<PAGE>
As filed with the Securities and Exchange Commission on September 18, 1998
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. 31
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 33
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)
|_| on [date] pursuant to paragraph (b)
|X| 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
================================================================================
MFS STRATEGIC GROWTH FUND
Supplement dated November 17, 1998 to the Current Prospectus
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated November 17, 1998. The caption
headings used in this Supplement correspond with the caption headings used in
the Prospectus.
You may purchase class I shares only if you are an eligible institutional
investor, as described under the caption "Principal Share Characteristics"
below.
1. RISK RETURN SUMMARY
Performance Table. The "Performance Table" is supplemented as follows:
Average Annual Total Returns as of December 31, 1997
1 Year Life*
Class I shares 50.68% 46.37%
- --------------
* For the period from the commencement of the Fund's investment operations on
January 2, 1996, through December 31, 1997.
The fund initially offered class A shares on January 2, 1996 and class I shares
on January 2, 1997. Class I share performance includes the performance of the
fund's class A shares for periods prior to the offering of class I shares. Class
I share performance generally would have been higher than class A share
performance had class I shares been offered for the entire period, because
operating expenses (e.g., distribution and service fees) attributable to class I
shares are lower than those of class A shares. Class I share performance has
been adjusted to take into account the fact that class I shares have no initial
sales charge.
2. EXPENSE SUMMARY
Expense Table. The "Expense Table" is supplemented as follows:
Shareholder Fees:
(fees deducted directly from your investment)
Class I
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage
of offering price).......................... 0.00%
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of
original purchase price or redemption
proceeds, whichever is less)................ 0.00%
Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
Management Fees.................................. 0.75%
Distribution and Service (12b-1) Fees............ 0.00%
Other Expenses (before any expense
reduction)(1) (2).............................. 0.76%
Total Annual Fund Operating Expenses (before ______
any expense reduction)(3)...................... 1.51%
-1-
<PAGE>
(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. The Fund may enter
into other similar arrangements and directed brokerage arrangements,
which would also have the effect of reducing the fund's expenses.
"Other Expenses" do not take into account these expense reductions,
and therefore do not represent the actual expenses of the fund.
(2) MFS has agreed to bear the fund's expenses, subject to reimbursement
by the fund, such that "Other Expenses" do not exceed the annual rate
of 0.50% of the fund's average daily net assets during the current
fiscal year. "Other Expenses" do not take into account this expense
arrangement, and therefore do not represent the actual expenses of the
fund.
(3) "Total Annual Fund Operating Expenses" do not take into account the
expense reduction arrangements described above, and therefore do not
represent the actual expenses of the fund. After taking these
arrangements into account, "Total Operating Expenses" for class I
shares is 1.25%, annually.
Example of Expenses. The "Example of Expenses" tables are supplemented
as follows:
Without Giving Effect to Expense Reductions
Share Class Year 1 Year 3 Year 5 Year 10
- ----------- ------ ------ ------ -------
Class I shares $15 $48 $82 $180
Giving Effect to Expense Reductions
Share Class Year 1 Year 3 Year 5 Year 10
- ----------- ------ ------ ------ -------
Class I shares $13 $40 $69 $151
3. PRINCIPAL SHARE CHARACTERISTICS
The discussion of "Principal Share Characteristics" is supplemented as follows:
If you are an eligible institutional investor (as described below), you may
purchase class I shares at net asset value without an initial sales charge or
CDSC upon redemption. Class I shares do not have annual distribution and service
fees, and do not convert to any other class of shares of the fund.
The following eligible institutional investors may purchase class I shares:
certain retirement plans established for the benefit of employees of
MFS and employees of MFS' affiliates;
any fund distributed by MFS, if the fund seeks to achieve its
investment objective by investing primarily in shares of the fund and
other MFS funds;
any retirement plan, endowment or foundation which:
purchases shares directly through MFD (rather than
through a third party broker or dealer or other financial
adviser);
has, at the time of purchase of class I shares, aggregate
assets of at least $100 million; and
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 (additional investments may be made
in any amount).
-2-
<PAGE>
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;
bank trust departments or law firms acting as trustee or manager for
trust accounts which initially invest, on behalf of their clients, at
least $100,000 in class I shares of the fund (additional investments
may be made in any amount). MFD may accept smaller initial purchases if
it believes, in its sole discretion, that the bank trust department or
law firm 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; and
certain retirement plans offered, administered or sponsored by
insurance companies, provided that these plans and insurance companies
meet certain criteria established by MFD from time to 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.
4. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
You may purchase, redeem and exchange class I shares only through your MFD
representative or by contacting MFSC (see the back cover of the Prospectus for
address and phone number). You may exchange your class I shares for class I
shares of another MFS Fund (if you are eligible to purchase them) and for shares
of the MFS Money Market Fund at net asset value.
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is supplemented as follows:
Financial Statements - Class I Shares
<TABLE>
<S> <C> <C>
Year Ended Period Ended
August 31, 1998 August 31, 1997*
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period [TO COME] $12.08
Income from Investment Operations#
Net investment income lossss. $(0.04)
Net realized and unrealized gain on investments and foreign currency 4.76
transactions
Total from investment operations 4.72
Net asset value - end of period $16.80
Total return 39.24%++
Ratios (to average net assets)/Supplemental datass.
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.
-3-
<PAGE>
ss. Subject to reimbursement by the Fund, the Adviser voluntarily agreed to
maintain expenses of the fund, exclusive of management 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> <C>
Net investment loss $_________ $(0.06)
Ratios (to average net assets):
Expenses _____% 1.14%+
Net Investment loss _____% (0.60)%+
</TABLE>
-4-
<PAGE>
[GRAPHIC OMITTED]
PROSPECTUS
November 17, 1998
MFS(R) STRATEGIC GROWTH FUND
Class A Shares
Class B Shares
(A member of the MFS Family of Funds(R)) Class C Shares
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
- -------------------------------------------------------------------------------
This Prospectus describes the MFS Strategic Growth Fund. The investment
objective of the fund is capital appreciation.
The Securities and Exchange Commission has not approved the
fund's shares as an investment or determined whether
this prospectus is accurate or complete. Anyone who
tells you otherwise is committing a crime.
<PAGE>
Table of Contents
Page
1. Risk Return Summary............................................... 1
2. Expense Summary................................................... 4
3. Investment Objective, Principal Strategies and Risks.............. 6
4. Management of the Fund............................................ 7
5. Principal Share Characteristics................................... 8
6. How to Purchase, Exchange and Redeem Shares....................... 10
7. Investor Services and Programs.................................... 12
8. Other Information................................................. 14
9. Financial Highlights.............................................. 15
Appendix A - Sales Charge Categories Available to Certain Retirement Plans. A-1
<PAGE>
1. RISK RETURN SUMMARY
Investment Objective Capital appreciation.
Principal Investment Strategies The fund invests primarily in
common stocks of companies which
its investment adviser,
Massachusetts Financial Services
Company (referred to as MFS
or the adviser), believes offer
superior prospects for growth.
While the fund will invest
primarily in U.S. securities, it
also may invest in foreign
securities (including emerging
market securities) which are not
traded on a U.S.exchange.
Principal Risks of an Investment Your investment in the fund is
subject to certain risks:
The value of the securities
in which the fund invests
may decline due to changing
economic, political or
market conditions, or due to
the financial condition of
the company which issued the
security.
The fund's performance is
particularly sensitive to
changes in the value of
stocks of growth-oriented
companies. A decline in the
value of these types of
stocks may result in a
decline in the fund's net
asset value and your
investment.
The fund's investment in
foreign securities,
particularly in emerging
market securities, involves
additional risks relating to
political, social and
economic developments
abroad. Other risks from
these investments result
from the differences between
the regulations to which
U.S. and foreign issuers and
markets are subject.
As with any mutual fund,
you could lose money on your
investment in the fund.
An investment in the fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
-1-
<PAGE>
Bar Chart and Performance Table
The bar chart and performance table below are intended to indicate some of
the risks of investing in the fund by showing the fund's performance over
time. The chart and table provide past performance information. The fund's
past performance does not necessarily indicate how the fund will perform in
the future. The performance information in the chart and table is based
upon calendar year periods, while the performance information presented
under the caption "Financial Highlights" and in the fund's shareholder
reports is based upon the fund's fiscal year. Therefore, these performance
results differ.
Bar Chart
The bar chart shows changes in the annual total returns of the fund's class
A shares for each calendar year since class A shares were first offered.
The chart and related notes do not take into account any sales charges that
you may be required to pay upon purchase or redemption of the fund's
shares, but do include the reinvestment of distributions. Any sales charge
will reduce your return. The return of the fund's other classes of shares
will differ from the class A returns shown in the bar chart, depending upon
the expenses of those classes.
[OBJECT OMITTED]
The total return for the fund's class A shares for the six month period
ended June 30, 1998 was 26.1%.
During the period shown in the bar chart, the highest quarterly return was
24.52% (for the calendar quarter ended June 30, 1997) and the lowest
quarterly return was 3.28% (for the calendar quarter ended March 31, 1997).
-2-
<PAGE>
Performance Table
This table shows how the average annual total returns of each class of the
fund compares to various market indicators. Class performance is shown both
with and without sales charges you may be required to pay when you purchase
or redeem fund shares and assumes the reinvestment of distributions.
- -------------------------------------------------------------------------------
Average Annual Total Returns as of December 31, 1997
<TABLE>
<S> <C> <C>
1 Year Life*
Class A shares, with deduction of initial sales charge 41.76% 41.97%
(SEC performance)
Class A shares, at net asset value 50.40% 46.24%
Class B shares, with deduction of CDSC (SEC performance) 45.53% 43.85%
Class B shares, at net asset value 49.63% 45.86%
Class C shares, with deduction of CDSC (SEC performance) 48.83% 45.97%
Class C shares, at net asset value 49.85% 45.97%
Average growth fund+ 25.34% 23.04%
Standard & Poor's 500 Composite Index**++ 33.36% 28.10%
Consumer Price Index***++ 1.71% 2.55%
</TABLE>
- --------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations on
January 2, 1996, through December 31, 1997.
+ Source: Lipper Analytical Services, Inc.
++ Source: CDA/Wiesenberger.
** The Standard & Poor's 500 Composite Index is a market capitalization
weighted price index composed of 500 widely held common stocks.
*** The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
Class A share performance calculated according to Securities and Exchange
Commission (referred to as the SEC) rules (referred to as SEC performance)
takes into account the deduction of the 5.75% maximum sales charge. Class B
SEC performance takes into account the deduction of the applicable
contingent deferred sales charge (referred to as a CDSC), which declines
over six years from 4% to 0%. Class C SEC performance takes into account
the deduction of the 1% CDSC.
The fund initially offered class A shares on January 2, 1996 and class B
and C shares on April 11, 1997. Class B and class C share performance
include the performance of the fund's class A shares for periods prior to
the offering of class B and class C shares. Class B and class C share
performance generally would have been lower than class A share performance
had class B and class C shares been offered for the entire period, because
certain operating expenses (e.g., distribution and service fees)
attributable to class B and class C shares are higher than those of class A
shares. Class B and class C share SEC performance has been adjusted to take
into account the CDSC applicable to class B and class C shares, rather than
the initial sales charge applicable to class A shares.
Performance results include any applicable expense reduction arrangements,
which may cause the results to be more favorable. Current reduction
arrangements may be discontinued at any time.
-3-
<PAGE>
2. EXPENSE SUMMARY
Expense Table
This table describes the fees and expenses that you may pay, directly or
indirectly, when you buy, redeem and hold shares of the fund. These
expenses do not take into account any applicable expense reduction
arrangements, and therefore may not reflect the actual expenses of the
fund.
Shareholder Fees:
(fees deducted directly from your investment)
<TABLE>
<S> <C> <C> <C>
Class A Class B Class C
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage
of offering price).......................... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales
Charge (Load) (as a percentage of
original purchase price or redemption
proceeds, whichever is less)................ See Below(1) 4.00% 1.00%
Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
Management Fees.................................. 0.75% 0.75% 0.75%
Distribution and Service (12b-1) Fees(2)......... 0.35% 1.00% 1.00%
Other Expenses (before any expense
reduction)(3) (4).............................. 0.76% 0.76% 0.76%
Total Annual Fund Operating Expenses (before any ______ ______ ______
expense reduction)(5).......................... 1.86% 2.51% 2.51%
</TABLE>
(1) An initial sales charge will not be deducted from your purchase if you
buy $1 million or more of class A shares, or if you are investing
through a retirement plan and your class A purchase meets certain
requirements. However, in this case, a contingent deferred sales charge
(referred to as a CDSC) of 1% may be deducted from your redemption
proceeds if you redeem your investment within 12 months.
(2) The fund adopted a distribution plan under Rule 12b-1 that permits it
to pay marketing and other fees to support the sale and distribution of
class A, B and C shares and the services provided to you by your
financial adviser (referred to as distribution and service fees).
(3) 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. The Fund may enter into
other similar arrangements and directed brokerage arrangements, which
would also have the effect of reducing the fund's expenses. "Other
Expenses" do not take into account these expense reductions, and are
therefore higher than the actual expenses of the fund.
(4) MFS has agreed to bear the fund's expenses, subject to reimbursement by
the fund, such that "Other Expenses" do not exceed the annual rate of
0.50% of the fund's average daily net assets during the current fiscal
year. This arrangement is voluntary and may be terminated by MFS at any
time. "Other Expenses" do not take into account this expense
arrangement, and therefore are higher than the actual expenses of the
fund.
(5) "Total Annual Fund Operating Expenses" do not take into account the
expense reduction arrangements described above, and therefore are
higher than the actual expenses of the fund. After taking these
arrangements into account, "Total Annual Fund Operating Expenses" for
class A shares is 1.60%, for class B shares is 2.25%, and for class C
shares is 2.25%, annually.
-4-
<PAGE>
Example of Expenses
These examples are intended to help you compare the cost of investing in
the fund with the cost of investing in other mutual funds (these costs are
expenses deducted from fund assets).
The examples assume that:
o You invest $10,000 in the fund for the time periods indicated;
o Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
o The fund's operating expenses remain the same.
Without Giving Effect to Expense Reductions
This first example does not take into account the expense reduction
arrangements discussed in the footnotes to the Expense Summary, and is not
based on the fund's actual expenses. Instead it is based on what the fund's
expenses would be without the expense reduction arrangements, making the
amounts presented below higher than the fund's actual expenses. Although
your actual costs may be higher or lower, under these assumptions your
costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Share Class Year 1 Year 3 Year 5 Year 10
----------- ------ ------ ------ -------
Class A shares $75 $113 $152 $263
Class B shares
Assuming redemption at end of period $65 $108 $154 $268
Assuming no redemption $25 $78 $134 $268
Class C shares
Assuming redemption at end of period $35 $78 $134 $285
Assuming no redemption $25 $78 $134 $285
</TABLE>
Giving Effect to Expense Reductions
This second example takes into account the expense reduction arrangements
discussed in the Expense Summary. Although your actual costs may be higher
or lower, under these assumptions your costs would be:
<TABLE>
<S> <C> <C> <C> <C>
Share Class Year 1 Year 3 Year 5 Year 10
----------- ------ ------ ------ -------
Class A shares $72 $102 $135 $226
Class B shares
Assuming redemption at end of period $63 $100 $140 $239
Assuming no redemption $23 $70 $120 $239
Class C shares
Assuming redemption at end of period $33 $70 $120 $258
Assuming no redemption $23 $70 $120 $258
</TABLE>
-5-
<PAGE>
3. INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RISKS
Investment Objective
The fund's investment objective is capital appreciation. Approval by the
fund's shareholders is not required to modify or change the fund's
objective.
Principal Investment Strategies
The fund invests, under normal market conditions, at least 65% of its total
assets in common stocks of companies which MFS believes offer superior
prospects for growth.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the fund) it advises. This
means that securities are selected based upon fundamental analysis
performed by the fund's portfolio manager and MFS' large group of equity
research analysts. Securities are not selected based upon the type of
industries to which they belong.
In managing the fund, MFS seeks to purchase securities of companies which
MFS considers well-run and poised for growth. MFS looks particularly for
companies which demonstrate:
a strong franchise, strong cash flows and a recurring revenue
stream
a solid industry position, where there is
potential for high profit margins
substantial barriers to new entry in the industry
a strong management team with a clearly defined strategy
a catalyst which may accelerate growth
In pursuing this investment strategy, the fund may invest up to 20% of its
net assets in foreign securities (including emerging markets securities).
Under normal market conditions, the fund will stay fully invested in common
stocks and related securities, such as preferred stock, convertible
securities and equity options. However, the fund may depart from its
principal investment strategies by temporarily investing for defensive
purposes when adverse market, economic or political conditions exist. While
the fund invests defensively, it may not be able to pursue its investment
objective.
The fund may engage in active and frequent trading to achieve its principal
investment strategies. This may result in the realization and distribution
to shareholders of higher capital gains, which would increase your tax
liability. Frequent trading also increases transaction costs, which could
detract from the fund's performance.
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not described in this
Prospectus. These types of securities and investment techniques and
practices, and their risks, are identified and discussed in the Fund's
Statement of Additional Information (referred to as the SAI), which you may
obtain by contacting MFS Service Center, Inc. (see back cover for address
and phone number).
Principal Risks
The principal risks of investing in the fund and the circumstances
reasonably likely to cause the value of your investment in the fund to
decline are described below. As with any non-money market mutual fund, the
share price of the fund will change daily based on market conditions and
other factors. Please note that there are many circumstances which could
cause the value of your investment in the fund to decline, and which could
prevent the fund from achieving its objective, that are not described here.
The principal risks of investing in the fund are:
Market Risk: This is the risk that the price of a security held
by the fund will fall due to changing economic, political or
market conditions, or due to the financial condition of the
company which issued the security.
Growth Companies: This is the risk that the prices of growth
company securities held by the fund, which are the fund's
principal investment focus, will fall to a greater extent than the
overall equity markets (e.g., as represented by the Standard and
Poor's Composite 500 Index) due to changing economic, political or
market conditions.
-6-
<PAGE>
Foreign Securities: Investments in foreign securities involve
risks relating to political, social and economic developments
abroad, as well as risks resulting from the differences between
the regulations to which U.S. and foreign issuers and markets are
subject:
These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on
dividends and interest, limitations on the use or transfer of
portfolio assets, and political or social instability.
Enforcing legal rights may be difficult, costly and slow in
foreign countries, and there may be special problems enforcing
claims against foreign governments.
Foreign companies may not be subject to accounting standards
or governmental supervision comparable to U.S. companies, and
there may be less public information about their operations.
Foreign markets may be less liquid and more volatile than U.S.
markets.
Foreign securities often trade in currencies other than the
U.S. dollar, so changes in currency exchange rates will affect
the fund's net asset value, the value of dividends and
interest earned, and gains and losses realized on the sale of
securities. An increase in the strength of the U.S. dollar
relative to these other currencies may cause the value of the
fund to decline.
Emerging Markets Securities: Emerging markets are generally
defined as countries in the initial stages of their
industrialization cycles with low per capita income. Investments
in emerging markets securities involve all of the risks of
investments in foreign securities, and also have additional risks:
All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries.
The markets of emerging markets countries have been more
volatile than the markets of developed countries with more
mature economies. These markets often have provided higher
rates of return, and significantly greater risks, to
investors.
4. MANAGEMENT OF THE FUND
Investment Adviser
Massachusetts Financial Services Company (referred to as MFS or the
adviser) is the fund's investment adviser. 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, Massachusetts Investors Trust. Net assets under the management of the
MFS organization were approximately $78.1 billion on behalf of
approximately 3.4 million investor accounts as of August 31, 1998. As of
such date, the MFS organization managed approximately $51 billion of net
assets in equity funds and equity portfolios. Approximately $4.4 billion of
the assets managed by MFS are invested in securities of foreign issuers and
foreign denominated securities of U.S. issuers. MFS is located at 500
Boylston Street, Boston, Massachusetts 02116.
MFS provides overall investment advisory services and facilities to the
fund, for which the fund pays MFS an annual management fee of 0.75% of the
fund's average daily net asset value.
Portfolio Manager
The fund's portfolio manager is Christian A. Felipe, a Senior Vice
President of MFS. Mr. Felipe has been the portfolio manager of the fund
since the fund's inception and has been employed [as a portfolio manager]
by MFS since 1986.
Administrator
MFS provides the fund with certain financial, legal, compliance,
shareholder communications and other administrative services. MFS is
reimbursed by the fund for a portion of the costs it incurs in providing
these services.
-7-
<PAGE>
Distributor
MFS Fund Distributors, Inc. (referred to as MFD), a wholly owned subsidiary
of MFS, is the distributor of shares of the fund.
Shareholder Servicing Agent
MFS Service Center, Inc. (referred to as MFSC), a wholly owned subsidiary
of MFS, performs transfer agency and certain other services for the fund,
for which it receives compensation from the fund.
5. PRINCIPAL SHARE CHARACTERISTICS
The Fund offers class A, B and C shares through this prospectus. The Fund
also offers an additional class of shares, class I shares, exclusively to
certain institutional investors. Class I shares are made available through
a separate prospectus supplement provided to institutional investors
eligible to purchase them.
Sales Charges
You may be subject to an initial sales charge when you purchase, or a CDSC
when you redeem, class A, B or C shares. These sales charges are described
below. In certain circumstances, these sales charges are waived. These
circumstances are described in the SAI. Special considerations concerning
the calculation of the CDSC that apply to each of these classes of shares
are described below under the heading "Calculation of CDSC."
If you purchase your fund shares through a financial adviser (such as a
broker or bank), the adviser may receive commissions or other concessions
which are paid from various sources, such as from the sales charges and
distribution and service fees, or from MFS or MFD. These commissions and
concessions are described in the SAI.
Class A shares
You may generally purchase class A shares at net asset value plus an
initial sales charge, but in some cases you may purchase class A shares
without an initial sales charge but subject to a 1% CDSC upon redemption
within one year. Class A shares have annual distribution and service fees
up to a maximum of 0.35% of net assets annually.
Purchases Subject to an Initial Sales Charge. The amount of
the initial sales charge you pay when you buy class A shares differs
depending upon the amount you invest, as follows:
<TABLE>
<S> <C> <C> <C>
Sales Charge* as Percentage of:
Offering Net Amount
Amount of Purchase Price Invested
Less than $50,000....................................... 5.75% 6.10
$50,000 but less than $100,000.......................... 4.75 4.99
$100,000 but less than $250,000......................... 4.00 4.17
$250,000 but less than $500,000......................... 2.95 3.04
$500,000 but less than $1,000,000....................... 2.20 2.25
$1,000,000 or more...................................... None** None**
</TABLE>
- -----------
* Because of rounding in the calculation of offering price, actual sales
charges you pay may be more or less than those calculated using these
percentages.
** A 1% CDSC will apply to such purchases, as discussed below.
Purchases Subject to a CDSC (but not an initial sales charge).
You pay no initial sales charge when you invest $1 million or more in class
A shares. However, a CDSC of 1% will be deducted from your redemption
proceeds if you redeem within 12 months of your purchase. This pricing
structure also applies to investments in class A shares by certain
retirement plans, as described in Appendix A.
-8-
Class B shares
You may purchase class B shares at net asset value without an initial sales
charge, but if you redeem your shares within the first six years you may be
subject to a CDSC (declining from 4.00% during the first year to 0% after
six years). Class B shares have annual distribution and service fees up to
a maximum of 1.00% of net assets annually.
The CDSC is imposed according to the following schedule:
Contingent
Year of Redemption After Deferred Sales
Purchase Charge
First................................................. 4%
Second................................................ 4%
Third................................................. 3%
Fourth................................................ 3%
Fifth................................................. 2%
Sixth................................................. 1%
Seventh and following................................. 0%
If you hold Class B shares for approximately eight years, they will convert
to class A shares of the fund. All class B shares you purchased through the
reinvestment of dividends and distributions will be held in a separate
sub-account. Each time any class B shares in your account convert to class
A shares, a proportionate number of the class B shares in the sub-account
will also convert to class A shares.
Class C Shares
You may purchase class C shares at net asset value without an initial sales
charge, but if you redeem your shares within the first year you may be
subject to a CDSC of 1.00%. Class C shares have annual distribution and
service fees up to a maximum of 1.00% of net assets annually. Class C
shares do not convert to any other class of shares of the fund.
Calculation of CDSC
As discussed above, certain investments in class A, B and C shares will be
subject to a CDSC. Three different aging schedules apply to the calculation
of the CDSC:
Purchases of class A shares made on any day during a calendar
month will age one month on the last day of the month, and each
subsequent month.
Purchases of class C shares, and purchases of class B shares on
or after January 1, 1993, made on any day during a calendar
month will age one year at the close of business on the last day
of that month in the following calendar year, and each
subsequent year.
Purchases of class B shares prior to January 1, 1993 made on
any day during a calendar year will age one year at the close of
business on December 31 of that year, and each subsequent year.
No CDSC is assessed on the value of your account represented by
undistributed capital gains or income. In addition, no CDSC is assessed on
additional shares acquired through the automatic reinvestment of dividends
or capital gain distributions. Therefore, when you redeem your shares, only
the value of the shares in excess of these amounts (i.e., your direct
investment) is subject to a CDSC.
The CDSC will be applied in a manner that results in the CDSC being imposed
at the lowest possible rate. The applicability of a CDSC will not be
affected by exchanges or transfers of registration, except as described in
the SAI.
-9-
<PAGE>
Distribution and Service Fees
The fund has adopted a plan under Rule 12b-1 that permits it to pay
marketing and other fees to support the sale and distribution of class A, B
and C shares and the services provided to you by your financial adviser.
These annual distribution and service fees may equal up to 0.35% for class
A shares and 1.00% for each of class B and class C shares, and are paid out
of the assets of these classes. Over time, these fees will increase the
cost of your shares and may cost you more than paying other types of sales
charges.
6. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
You may purchase, exchange and redeem class A, B and C shares of the fund
in the manner described below. In addition, you may be eligible to
participate in certain investor services and programs to purchase, exchange
and redeem these classes of shares, which are described in the next section
under the caption "Investor Services and Programs."
How to Purchase Shares
Initial Purchase
You can establish an account with a minimum initial investment of $1,000.
However, in the following circumstances the minimum initial investment is
only $50 per account:
if you establish an automatic investment plan;
if you establish an automatic exchange plan; or
if you establish an account under either:
tax-deferred retirement programs (other than IRAs)
where investments are made by means of group remittal
statements; or
employer sponsored investment programs.
The minimum initial investment for IRAs is $250 per account. The maximum
investment in class C shares is $1,000,000 per transaction. Class C shares
are not available for purchase by any retirement plan qualified under
Section 401(a) or 403(b) of the Internal Revenue Code if the plan or its
sponsor subscribes to certain recordkeeping services made available by
MFSC, such as the MFS Fundamental 401(k) Plan.
Adding to Your Account
There are several easy ways you can make additional investments of at least
$50 to your account:
send a check with the returnable portion of your statement;
ask your financial adviser to purchase shares on your behalf;
wire additional investments through your bank (call MFSC
first for instructions); or
authorize transfers by phone between your bank account
and your MFS account (the maximum purchase amount for this
method is $100,000). You must elect this privilege on your
account application if you wish to use it.
How to Exchange Shares
You can exchange your shares for shares of the same class of certain other
MFS funds at net asset value. The minimum exchange amount is generally
$1,000 ($50 for exchanges made under the automatic exchange plan). Shares
otherwise subject to a CDSC
-10-
<PAGE>
will not be charged a CDSC in an exchange. However, when you redeem the
shares acquired through the exchange, the shares you redeem may be subject
to a CDSC, depending upon when you originally purchased the shares you
exchanged. For purposes of computing the CDSC, the length of time you have
owned your shares will be measured from the date of original purchase and
will not be affected by any exchange.
Sales charges may apply to exchanges made from the MFS money market funds.
Certain qualified retirement plans may make exchanges between the MFS funds
and the MFS Fixed Fund, a bank collective investment fund, and sales
charges may also apply to these exchanges. Call MFSC for information
concerning these sales charges.
Exchanges are subject to the MFS funds' market timing policies. You should
read the prospectus of the MFS fund into which you are exchanging and
consider the differences in objectives, policies and rules before making
any exchange.
How to Redeem Shares
You may redeem your shares either by contacting MFSC directly or having
your financial adviser process your redemption. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. Under unusual circumstances such as when the New York Stock
Exchange is closed, trading on the Exchange is restricted or if there is an
emergency, the fund may suspend redemptions or postpone payment. If you
purchased the shares you are redeeming by check, the fund may delay the
payment of the redemption proceeds for up to 15 days from the purchase date
to assure that the check has cleared. Your need to have your signature
guaranteed and/or submit additional documentation to redeem your shares.
See "Signature Guarantee/Additional Documentation" below, or contact MFSC
for details (see back cover page for address and phone number).
Redeeming directly through MFSC
By telephone. You can call MFSC to have shares redeemed
from your account and the proceeds wired or mailed
(depending on the amount redeemed) directly to a
pre-designated bank account. MFSC will request personal or
other information from you and will generally record the
calls. MFSC will be responsible for losses that result
from unauthorized telephone transactions if it does not
follow reasonable procedures designed to verify your
identity. You must elect this privilege on your account
application if you wish to use it.
By mail. To redeem shares by mail, you can send a letter
to MFSC with the name of your fund, your account number,
and the number of shares or dollar amount to be sold.
Redeeming through your financial adviser
You can call your financial adviser to process a redemption on your behalf.
Your financial adviser will be responsible for furnishing all necessary
documents to MFSC and may charge you for this service.
Signature guarantee/Additional documentation
In order to protect against fraud, the fund requires that your signature be
guaranteed in order to redeem your shares. Your signature may 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 MFSC, and MFSC may make certain deminimis
exceptions to the signature guarantee requirement. MFSC may require
additional documentation for certain types of registrations and
transactions.
Other Considerations
Right to Reject Purchase Orders/Market Timing
Purchases and exchanges should be made for investment purposes only. The
MFS Funds each reserve the right to reject or restrict any specific
purchase or exchange request. Because an exchange request involves both a
request to redeem shares of one fund and to purchase shares of another
fund, the MFS Funds consider the underlying redemption and purchase
requests conditioned upon the acceptance of each of these underlying
requests. Therefore, in the event that the MFS Funds reject an exchange
request, neither the redemption nor the purchase side of the exchange will
be processed.
-11-
<PAGE>
The MFS Funds are not designed for professional market timing organizations
or other entities using programmed or frequent exchanges. The MFS Funds
define a "market timer" as an individual, or organization acting on behalf
of one or more individuals, if:
the individual or organization makes during the calendar year either
(i) six or more exchange requests among the MFS Funds or (ii)
three or more exchange requests out of any of the MFS high yield
bond funds or MFS municipal bond funds; and
any one of such exchange requests represents shares equal in value
to $1 million or more.
Accounts under common ownership or control, including accounts administered
by market timers, will be aggregated for purposes of this definition.
The MFS Funds may impose specific limitations on market timers, including:
delaying for up to seven days the purchase side of an exchange
request by market timers;
rejecting or otherwise restricting purchase or exchange requests by
market timers; and
permitting exchanges by market timers only into certain MFS Funds.
Reinstatement privilege
After you have redeemed shares, you have a one-time right to reinvest the
proceeds within 90 days of the redemption at the current net asset value
(without an initial sales charge). If the redemption involved a CDSC, your
account will be credited with the appropriate amount of the CDSC paid;
however, your new shares will be subject to a CDSC which will be determined
from the date you originally purchased the shares redeemed. This privilege
applies to shares of the MFS money market funds only under certain
circumstances.
In-kind distributions
The MFS funds have reserved the right to pay redemption proceeds by a
distribution in-kind of portfolio securities (rather than cash). In the
event that the fund makes an in-kind distribution, you could incur the
brokerage and transaction charges when converting the securities to cash.
The fund does not expect to make in-kind distributions, and if it does, the
fund will pay, during any 90-day period, your redemption proceeds in cash
up to either $250,000 or 1% of the fund's net assets, whichever is less.
Involuntary Redemptions/Small Accounts
Because it is costly to maintain small accounts, the MFS funds have
generally reserved the right to automatically redeem shares and close your
account when it contains less than $500 due to your redemptions or
exchanges. Before making this automatic redemption, you will be notified
and given 60 days to make additional investments to avoid having your
shares redeemed.
7. INVESTOR SERVICES AND PROGRAMS
As a shareholder of the fund, you have available to you a number of
services and investment programs. Some of these services and programs may
not be available to you if your shares are held in the name of your
financial adviser or if your investment in the fund is made through a
retirement plan.
Distribution Options
The following distribution options are generally available to all accounts
and you may change your distribution option as often as you desire by
notifying MFSC:
-12-
<PAGE>
o Dividends and capital gain distributions reinvested in additional
shares (this option will be assigned if no other option is
specified);
o Dividends (including short-term capital gains) in cash; capital
gain distributions reinvested in additional shares; or
o 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 as
of 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 you have elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to your address of record, or you do
not respond to mailings from MFSC with regard to uncashed distribution
checks, your distribution option will automatically be converted to having
all dividends and other distributions reinvested in additional shares. Your
request to change a distribution option must be received by MFSC 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.
Purchase and Redemption Programs
For your convenience, the following purchase and redemption programs are
made available to you with respect to class A, B and C shares, without
extra charge:
Automatic Investment Plan. You can make cash investments of $50 or
more through your checking account or savings account on any day of the
month. If you do not specify a date, the investment will automatically
occur on the first business day of the month.
Automatic Exchange Plan. If you have an account balance of at least
$5,000 in any MFS fund, you may participate in the automatic exchange plan,
a dollar-cost averaging program. This plan permits you to make automatic
monthly or quarterly exchanges from your account in an MFS fund for shares
of the same class of shares of other MFS funds. You may make exchanges of
at least $50 to up to six different funds under this plan. Exchanges will
generally be made at net asset value without any sales charges. If you
exchange shares out of the MFS Money Market Fund or MFS Government Money
Market Fund, or if you exchange class A shares out of the MFS Cash Reserve
Fund, into class A shares of any other MFS fund, you will pay the initial
sales charge if you have not already paid this charge on these shares.
Reinvest without a sales charge. You can reinvest dividend and
capital gain distributions into your account without a sales charge to add
to your investment easily and automatically.
Distribution Investment Program. You may purchase shares of any MFS
fund without paying an initial sales charge or a CDSC upon redemption by
automatically reinvesting a minimum of $50 of dividend and capital gain
distributions from the same class of another MFS fund.
Letter of Intent (LOI). If you intend to invest $50,000 or more in
the MFS funds (including the MFS Fixed Fund) within 13 months, you may buy
class A shares of the funds at the reduced sales charge as though the total
amount were invested in class A shares in one lump sum. If you intend to
invest $1 million or more under this program, the time period is extended
to 36 months. If the intended purchases are not completed within the time
period, shares will automatically be redeemed from a special escrow account
established with a portion of your investment at the time of purchase to
cover the higher sales charge you would have paid had you not purchased
your shares through this program.
Right of Accumulation. You will qualify for a lower sales charge on
your purchases of class A shares when your new investment in class A
shares, together with the current (offering price) value of all your
holdings in the MFS funds (including the MFS Fixed Fund), reaches a reduced
sales charge level.
Systematic Withdrawal Plan. You may elect to automatically receive
(or designate someone else to receive) regular periodic payments of at
least $100. Each payment under this systematic withdrawal is funded through
the redemption of your fund shares. For class B and C shares, you can
receive up to 10% (15% for certain IRA distributions) of the value of your
account through these payments in any one year (measured at the time you
establish this plan). You will incur no CDSC on class B and C shares
redeemed under this plan. For class A shares, there is no similar
percentage limitation; however, you may incur the CDSC (if applicable) when
class A shares are redeemed under this plan.
-13-
<PAGE>
8. OTHER INFORMATION
Pricing of Fund Shares
The price of each class of the fund's shares is based on its net asset
value. The net asset value of each class of shares is determined at the
close of regular trading each day that the New York Stock Exchange is open
for trading (generally, 4:00 p.m., Eastern time) (referred to as the
valuation time). To determine net asset value, the fund values its assets
at current market values, or at fair value as determined by the Adviser
under the direction of the Board of Trustees that oversees the Fund if
current market values are unavailable. Fair value pricing may be used by
the fund when current market values are unavailable or when an event occurs
after the close of the exchange on which the fund's portfolio securities
are principally traded that is likely to have changed the value of the
securities. The use of fair value pricing by the fund may cause the net
asset value of its shares to differ significantly from the net asset value
that would be calculated using current market values.
You will receive the net asset value next calculated, after the deduction
of applicable sales charges and any required tax withholding, if your order
is complete (has all required information) and MFSC receives your order by:
o the valuation time, if placed directly by you (not through a
financial adviser such as a broker or bank) to MFSC; or
o MFSC's close of business, if placed through a financial adviser,
so long as the financial adviser received your order by the
valuation time.
The fund invests in certain securities which are primarily listed on
foreign exchanges that trade on weekends and other days when the fund does
not price its shares. Therefore, the value of the fund's shares may change
on days when you will not be able to purchase or redeem the fund's shares.
Distributions
The fund intends to pay substantially all of its net income (including net
short-term capital gain) to shareholders as dividends at least annually.
Any realized net capital gains are also distributed at least annually.
Tax Considerations
Taxability of distributions. As long as the fund qualifies for
treatment as a regulated investment company (which it has in the past and
intends to do in the future), it pays no federal income tax on the earnings
it distributes to shareholders.
You will normally have to pay federal income taxes, and any state or local
taxes, on the dividends and capital gain distributions you receive from the
Fund, whether you take the distributions in cash or reinvest them in
additional shares. Dividends designated as capital gains distributions are
taxable as long-term capital gains. Other dividends are generally taxable
as ordinary income. Some dividends paid in January may be taxable as if
they had been paid the previous December.
The form 1099 that is mailed to you every January details your
distributions and how they are treated for federal tax purposes. You should
verify your tax liability with your tax professional.
Fund distributions will reduce the Fund's net asset value per share.
Therefore, you buy shares shortly before the record date of a distribution,
you may pay the full price for the shares and then effectively receive a
portion of the purchase price back as a taxable distribution.
If you are neither a citizen nor a resident of the U.S., 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. 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 nether 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.
-14-
<PAGE>
Taxability of transactions. Anytime you sell or exchange shares, it
is considered a taxable event for you. Depending on the purchase price and
the sale price of the shares you sell or exchange, you may have a gain or a
loss on the transaction. You are responsible for any tax liabilities
generated by your transaction.
Provision of Annual and Semiannual Reports
To avoid sending duplicate copies of materials to households, only one copy
of the fund's annual and semiannual report will be mailed to shareholders
having the same residential address on the fund's records. However, any
shareholder may contact MFSC (see back cover for address and phone number)
to request that copies of these reports be sent personally to that
shareholder.
9. FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
fund's financial performance for the past 5 years, or, if the fund has not
been in operation that long, since the time it commenced investment
operations. Certain information reflects financial results for a single
fund share. The total returns in the table represent the rate by which an
investor would have earned (or lost) on an investment in the fund (assuming
reinvestment of all distributions). This information has been audited by
the fund's independent auditors, whose report, together with the fund's
financial statements, are included in the fund's Annual Report to
shareholders. These financial statements are incorporated by reference into
the SAI. The fund's independent auditors are Ernst & Young LLP.
<TABLE>
<S> <C> <C> <C>
Year Ended Year Ended Period Ended
August 31, 1998 August 31, 1997 August 31, 1996*
Class A Class A Class A
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period........... [TO COME] $ 12.26 $10.00
------- ------
Income from investment operations#--
Net investment income (loss).................. $ (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 datass.:
Expenses##...................................... 1.29% 0.44%+
Net investment income (loss).................... (0.82)% 0.23%+
Portfolio turnover................................ 82% 104%
Net assets at end of period (000 omitted)......... $21,699 $10,145
</TABLE>
- ----------
* 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.
ss. Subject to reimbursement by the Fund, MFS 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> <C> <C>
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>
-15-
<PAGE>
Financial Highlights
<TABLE>
<S> <C> <C> <C> <C>
Year Ended Period Ended Year Ended Period Ended
August 31, 1998 August 31, 1997* August 31, 1998 August 31, 1997*
Class B Class B Class C Class C
Per share data (for a share outstanding throughout
the period):......................................
Net asset value - beginning of period.............. [TO COME] $ 12.53 [TO COME] $12.53
------
Income from investment operations#--
Net investment lossss................................ $ (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 datass.:
Expenses##......................................... 2.02%+ 2.04%+
Net investment loss................................ (1.46)%+ (1.48)%+
Portfolio turnover.................................... 82% 82%
Net assets at end of period (000 omitted)............. $15,735 $6,048
</TABLE>
- ----------
* 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.
ss. Subject to reimbursement by the fund, MFS 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)%+
-16-
<PAGE>
Appendix A
Sales Charge Categories Available to Certain Retirement Plans
Purchases made under the following four categories are not subject to an
initial sales charge. However, a CDSC of 1% will be deducted from
redemption proceeds if the redemption is made within 12 months of purchase.
The CDSC is based on the value of the shares redeemed (excluding reinvested
dividend and capital gain distributions) or the total cost of the shares,
whichever is less.
Investments in class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
(referred to as ERISA), if, prior to July 1, 1996
the plan had established an account with MFSC; and
the sponsoring organization had demonstrated to the
satisfaction of MFD that either;
+ the employer had at least 25 employees; or
+ the total purchases by the retirement plan of class
A shares of the MFS Family of Funds (the MFS Funds)
would be in the amount of at least $250,000 within a
reasonable period of time, as determined by MFD in
its sole discretion
Investments in class A shares by certain retirement plans subject
to ERISA, if
the retirement plan and/or sponsoring organization
participates in the MFS Fundamental 401(k) Program or any
similar recordkeeping system made available by MFSC
(referred to as the MFS participant recordkeeping system);
the plan establishes an account with MFSC on or after July
1, 1996; and
the total purchases by the retirement plan of class A
shares of the MFS Funds will be in the amount of at least
$500,000 within a reasonable period of time, as determined
by MFD in its sole discretion
Investments in class A shares by certain retirement plans subject
to ERISA, if
the plan establishes an account with MFSC on or after July
1, 1996; and
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 MFSC 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; MFSC
has no obligation independently to determine whether such a plan
qualifies under this category; and
Investments in class A shares by certain retirement plans subject
to ERISA, if
the plan establishes an account with MFSC on or after July
1, 1997;
the plan's records are maintained on a pooled
basis by MFSC; and
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
A-1
<PAGE>
[GRAPHIC OMITTED]
Bulk Rate
U.S. Postage
Paid
MFS
MFS(R) STRATEGIC GROWTH FUND
If you want more information about the fund, the following documents are
available free upon request:
Annual/Semiannual Reports. These reports contain information about the
fund's actual investments. Annual reports discuss the effect of recent
market conditions and the fund's investment strategy on the fund's
performance during its last fiscal year.
Statement of Additional Information (SAI). The SAI, dated November 17,
1998, provides more detailed information about the fund and is incorporated
into this prospectus by reference.
You can get free copies of the annual/semiannual reports, the SAI and other
information about the fund, and make inquiries about the fund, by
contacting:
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116-3741
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
You may also contact the financial adviser (such as a broker or bank)
through which you purchased your shares to obtain this information.
You can get information about the fund (including its prospectus, SAI and
shareholder reports):
Upon payment of a duplicating fee, by writing to or calling the
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Telephone: 1-800-SEC-0330
For free from the Commission's Internet website at http://www.sec.gov
The fund's Investment Company Act file number is 811-4777 [use typeface
smaller than in prospectus]
<PAGE>
[MFS LOGO]
MFS(R) STRATEGIC GROWTH STATEMENT OF
FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) November 17, 1998
- --------------------------------------------------------------------------------
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
November 17, 1998. This SAI should be read in conjunction with the Prospectus.
The Fund's financial statements are incorporated into this SAI by reference to
the Fund's most recent Annual Report to shareholders. A copy of the Annual
Report accompanies this SAI. You may obtain a copy of the Fund's Prospectus and
Annual Report without charge by contacting MFS Service Center, Inc. (see back
cover for address and phone number).
This SAI is divided into two Parts -- Part I and Part II. Part I contains
information that is particular to the Fund, while Part II contains information
that generally applies to each of the funds in the MFS Family of Funds (the "MFS
Funds"). Each Part of the SAI has a variety of appendices which can be found at
the end of Part I and Part II, respectively.
This SAI is NOT a prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current prospectus.
<PAGE>
Statement of Additional Information
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
Page
1. DEFINITIONS................................................... 2
2. MANAGEMENT OF THE FUND........................................ 2
The Fund................................................ 2
Trustees and Officers - Identification and Background... 2
Trustee Compensation.................................... 2
Affiliated Service Provider Compensation................ 2
3. SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS.................. 2
Sales Charges........................................... 2
Distribution Plan Payments.............................. 2
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS.............. 2
5. SHARE OWNERSHIP............................................... 2
6. PERFORMANCE INFORMATION....................................... 2
7. INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS...... 2
Investment Techniques, Practices and Risks.............. 2
Investment Restrictions................................. 3
8. TAX CONSIDERATIONS............................................ 4
9. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS................. 4
APPENDIX A-- Trustees and Officers - Identification and Background A-1
APPENDIX B-- Trustee Compensation B-1
APPENDIX C-- Affiliated Service Provider Compensation C-1
APPENDIX D-- Sales Charges and Distribution Plan Payments D-1
APPENDIX E-- Portfolio Transactions and Brokerage Commissions E-1
APPENDIX F-- Share Ownership F-1
APPENDIX G-- Performance Information G-1
APPENDIX H-- Investment Techniques and Practices H-1
<PAGE>
1. DEFINITIONS
"Fund" -- MFS Strategic Growth Fund,
a 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.
"MFSC" -- MFS Service Center, Inc.,
a Delaware corporation
"Prospectus" -- The Prospectus of the Fund, dated November
17, 1998, as amended or supplemented from time
to time.
2. MANAGEMENT OF THE FUND
The Fund
The Fund is a diversified series of the Trust. The Trust is an open-end
management investment company.
Trustees and Officers - Identification and Background
The identification and background of the Trustees and officers of the Trust are
set forth in Appendix A of this Part I.
Trustee Compensation
Compensation paid to the non-interested Trustees and to Trustees who are not
officers of the Trust, for certain specified periods, is set forth in Appendix B
of this Part I.
Affiliated Service Provider Compensation
Compensation paid by the Fund to its affiliated service providers -- to MFS, for
investment advisory and administrative services, and to MFSC, for transfer
agency services -- for certain specified periods is set forth in Appendix C to
this Part I.
MFS has agreed to bear certain Fund expenses, as discussed in Appendix C to this
Part I.
3. SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
Sales charges paid in connection with the purchase and sale of Fund shares for
certain specified periods are set forth in Appendix D to this Part I, together
with the Fund's schedule of dealer reallowances.
Distribution Plan Payments
Payments made by the Fund under the Distribution Plan for its most recent fiscal
year end are set forth in Appendix D to this Part I.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund for certain specified periods, and
information concerning purchases by the Fund of securities issued by its regular
broker-dealers for its most recent fiscal year, are set forth in Appendix E to
this Part I.
5. SHARE OWNERSHIP
Information concerning the ownership of Fund shares by Trustees and officers of
the Trust as a group, by investors who control the Fund, if any, and by
investors who own 5% or more of any class of Fund shares, if any, is set forth
in Appendix F to this Part I.
6. PERFORMANCE INFORMATION
Performance information, as quoted by the Fund in sales literature and marketing
materials, is set forth in Appendix G to this Part I.
7. INVESTMENT TECHNIQUES, PRACTICES, RISKS AND RESTRICTIONS
Investment Techniques, Practices and Risks
The investment objective and principal investment policies of the Fund are
described in the Prospectus. In pursuing its investment objective and principal
investment policies, the Fund may engage in a number of investment techniques
and practices, which involve certain risks. These investment techniques and
practices, which may be changed without shareholder approval unless indicated
otherwise, are identified in Appendix H to this Part I, and are more fully
described, together with their associated risks, in Part II.
Part I - 2
<PAGE>
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).
Terms used below (such as Options and Futures Contracts) are defined in Part II
of this SAI.
The Fund may not:
(1) borrow amounts in excess of 33% 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 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;
Part I - 3
<PAGE>
(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% 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.
8. TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
9. 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 Securities and Exchange Commission.
The Portfolio of Investments and the Statement of Assets and Liabilities at
August 31, 1998, the Statement of Operations for the year ended August 31, 1998,
the Statement of Changes in Net Assets for the two years ended August 31, 1998,
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.
Part I - 4
<PAGE>
PART I - APPENDIX A
TRUSTEES AND OFFICERS - IDENTIFICATION AND BACKGROUND
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
JEFFREY L. SHAMES,* Chairman (born 6/2/55)
Massachusetts Financial Services Company, Chairman and Chief Executive Officer
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., Director and 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; CitiFunds and CitiSelect Folios (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
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President;
Wellfleet Investments (investor in health care companies),
Managing General Partner (since 1993)
Address: 294 Washington Street, 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)
Part I-A-1
<PAGE>
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. 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.), a subsidiary of Sun Life Assurance Company of Canada.
Part I-A-2
<PAGE>
PART I - APPENDIX B
TRUSTEE COMPENSATION
The Fund pays the compensation of non-interested Trustees and of Trustees who
are not officers of the Trust, who currently receive a fee of $_____ per year
plus $_____ per meeting and $_____ per committee meeting attended, together with
such Trustee's out-of-pocket expenses. [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.] In addition,
the Trust has a retirement plan for these Trustees as described under the
caption "Management of the Fund - Trustee Retirement Plan" in Part II. The
Retirement Age under the plan is 75.
Trustee Compensation Table
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)
Richard B. Bailey
Marshall N. Cohan
Dr. Lawrence Cohn
Sir David Gibbons
Abby M. O'Neill.
Walter E. Robb, III
Arnold D. Scott.
James L. Shames.
J. Dale Sherratt
Ward Smith......
- ----------
(1) For the fiscal year ending August 31, 1998.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1997. All Trustees served
as Trustees of __ funds within the MFS fund complex (having aggregate net
assets at December 31, 1997, of approximately $__ billion) except Mr.
Bailey, who served as Trustee of __ funds within the MFS complex (having
aggregate net assets at December, 1997 of approximately $____ billion).
[ADD RETIREMENT PLAN TABLE]
Part I-B-1
<PAGE>
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Paid to MFS for Paid to MFSC for Aggregate Amount
Paid to MFS for Amount Waived Administrative Transfer Agency Paid to MFS and
- - -------
Fiscal Year Ended Advisory Services by MFS Services Services MFSC
August 31, 1998 $ N/A $[_____] $[_____] $[_____]
August 31, 1997 $146,570 N/A $1,974** $[_____] $[_____]
August 31, 1996* $ 0 $[_____] N/A $[_____] $[_____]
</TABLE>
- ------------------------
* From January 2, 1996, the commencement of the Fund's investment operations
**From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Subject to termination or revision at the sole discretion of MFS, MFS 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, distribution
and service (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.
Part I-C-1
<PAGE>
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
Sales Charges
The following sales charges were paid during the specified periods:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Class A Initial Sales Charges: CDSC Paid to MFD on:
Fiscal Year End Total Retained By MFD Reallowed to Dealers Class A Shares Class B Shares Class C Shares
--------------- ----- --------------- -------------------- -------------- -------------- --------------
August 31, 1998 $_______ $_______ $_______ $_______ $_______ $_______
August 31, 1997 $322,213 $46,851 $275,362 $12 $403 $437
August 31, 1996* N/A N/A N/A N/A N/A N/A
</TABLE>
- --------------
* From January 2, 1996, the commencement date of the Fund's investment
operations.
Dealer Reallowances
As shown above, MFD pays (or "reallows") a portion of the Class A initial sales
charge to dealers. The dealer reallowance as expressed as a percentage of the
Class A shares' offering price is:
<TABLE>
<S> <C>
Dealer Reallowance
as a percent of
Amount of Purchase Offering Price
Less than $50,000 5.00%
$50,000 but less than $100,000 4.00%
$100,000 but less than $250,000 3.20%
$250,000 but less than $500,000 2.25%
$500,000 but less than $1,000,000 1.70%
$1,000,000 or more None*
</TABLE>
------------------
* A CDSC will apply to such purchase.
Distribution Plan Payments
During the fiscal year ended August 31, 1998, the Fund made the following
Distribution Plan payments:
Amount of Distribution
and Service Fees:
Paid Retained Paid to
Class of Shares By Fund By MFD By Dealers
Class A Shares
Class B Shares
Class C Shares
Part I-D-1
<PAGE>
PART I - APPENDIX E
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Brokerage Commissions
The following brokerage commissions were paid by the Fund during the specified
time periods:
Fiscal Year End Brokerage Commissions Paid by Fund
August 31, 1998 $______
August 31, 1997 $52,060
August 31, 1996 $19,205
Securities Issued by Regular Broker-Dealers
During the fiscal year ended August 31, 1998, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1998:
Broker-Dealer Value of Securities as of August 31, 1998
------------- -----------------------------------------
[To Come] $[To Come]
Part I-E-1
<PAGE>
PART I - APPENDIX F
SHARE OWNERSHIP
Ownership by Trustees and Officers
As of August 31, 1998, the Trustees and officers of the Trust as a group owned
less than 1% of any class of the Fund's shares, not including 954,812 Class I
shares of the Fund (which represent approximately 95% of the outstanding Class I
shares of the Fund) owned of record by certain employee benefit plans of MFS of
which Messrs. Scott and Shames are Trustees.
25% or Greater Ownership
The following table identifies those investors who own 25% or more of the Fund's
shares (all share classes taken together) as of August 31, 1998, and are
therefore presumed to control the Fund:
<TABLE>
<S> <C> <C>
Jurisdiction of
Organization
Name and Address of Investor (if a Company) Percentage Ownership
None
</TABLE>
5% or Greater Ownership of Share Class
The following table identifies those investors who own 5% or more of any class
of the Fund's shares as of August 31, 1998:
<TABLE>
<S> <C>
Name and Address of Investor Percentage Ownership
MLPF&S for the Sole Benefit of its Customers 5.19% of Class A shares
Attn: Fund Administration 97N51
4800 Deer Lake Drive E 3rd FL Jacksonville, FL 32246-6484
MLPF&S for the Sole Benefit of its Customers 7.39% of Class B shares
Attn: Fund Administration 97GT4
4800 Deer Lake Drive E 3rd FL Jacksonville, FL 32246-6484
MLPF&S for the Sole Benefit of its Customers 14.58% of Class C shares
Attn: Fund Administration 97N52
4800 Deer Lake Drive E 3rd FL Jacksonville, FL 32246-6484
TRS MFS DEF Contribution Plan 95.3% of Class I shares
c/o Mark Leary 19th FL
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
</TABLE>
Part I-F-1
<PAGE>
PART I - APPENDIX G
PERFORMANCE INFORMATION
All performance quotations are as of August 31, 1998.
<TABLE>
<S> <C> <C> <C> <C>
Actual
Average Annual 30-Day 30-Day Current
Total Returns Yield Yield Distribution
(Including (Without
Any
---------------------------
1 year Life of Fund Waivers) Waivers) Rate
Class A Shares, with initial sales charge (SEC ________% ________%* ________% ________% ________%
Performance)........................................
Class A Shares, at a net asset value...............________% ________%* N/A N/A N/A
Class B Shares, with CDSC (SEC Performance)........________% ________% N/A N/A N/A
Class B Shares, at net asset value.................________% ________% ________% ________% ________%
Class C Shares, with CDSC (SEC Performance)........________% ________% N/A N/A N/A
Class C Shares, at net asset value.................________% ________% ________% ________% ________%
Class I Shares, at net asset value.................________% ________% ________% ________% N/A
</TABLE>
- -----------------------------------
* From the class inception date on January 2, 1996.
Class A share performance calculated according to Securities and Exchange
Commission (referred to as the SEC) rules (referred to as SEC performance)
takes into account the deduction of the 5.75% maximum sales charge. Class B
SEC performance takes into account the deduction of the applicable
contingent deferred sales charge (referred to as a CDSC), which declines
over six years from 4% to 0%. Class C SEC performance takes into account
the deduction of the 1% CDSC. The fund initially offered class A shares on
January 2, 1996, class B and C shares on April 11, 1997 and Class I shares
on January 2, 1997.
Class B and class C share performance include the performance of the fund's
class A shares for periods prior to the offering of class B and class C
shares. Class B and class C share performance generally would have been
lower than class A share performance had class B and class C shares been
offered for the entire period, because the operating expenses (e.g.,
distribution and service fees) attributable to class B and class C shares
are higher than those of class A shares. Class B and class C share SEC
performance has been adjusted to take into account the CDSC applicable to
class B and class C shares, rather than the initial sales charge applicable
to class A shares.
Class I share performance includes the performance of the fund's class A
shares for periods to the offering of class I shares. Class I share
performance generally would have been higher than class A share performance
had class I shares been offered for the entire period, because operating
expenses (e.g., distribution and service fees) attributable to class I
shares are lower than those of class A shares. Class I share performance
has been adjusted to take into account the fact that class I shares have no
initial sales charge.
Performance results include any applicable expense subsidies and waivers,
which may cause the results to be more favorable. Current subsidies and
waivers may be discontinued at any time.
Part I-G-1
<PAGE>
PART I - APPENDIX H
INVESTMENT TECHNIQUES AND PRACTICES
This table indicates the extent to which the fund may engage in various
investment techniques and practices in pursuing its investment objective and
principal investment policies. These investment techniques and practices,
together with their risks, are described in Part II of the SAI. All percentage
limitations are based on the fund's net assets, unless otherwise specified.
Symbols
o no policy limitations on usage; fund may be using currently
|_| permitted, but has not typically been used
- -- not permitted
<TABLE>
<S> <C> <C>
Investment Techniques/Practices Extent Permitted
Asset-Backed Securities --
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Equity Securities o
Fixed Income Securities o
Foreign Securities Exposure 20%
Brady Bonds --
Depositary Receipts o
Dollar-Denominated Foreign Debt Securities o
Emerging Markets o
Foreign Securities o
Forward Contracts |_|
Futures Contracts |_|
Indexed Securities |_|
Inverse Floating Rate Obligations --
Investment in Other Investment Companies --
Laddering --
Lending of Portfolio Securities 30%
Leveraging Transactions --
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Securities --
Non-Diversified Status --
Options |_|
Options on Foreign Currencies |_|
Options on Futures Contracts |_|
Options on Securities |_|
Options on Stock Indices |_|
Reset Options |_|
"Yield Curve" Options |_|
Repurchase Agreements o
Restricted Securities o
Short Sales --
Speculative Bonds --
Swaps and Related Transactions |_|
Temporary Borrowings 5%*
Temporary Defensive Positions o
U.S. Government Securities o
Variable and Floating Rate Obligations --
Warrants o
"When-issued" Securities |_|
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds --
</TABLE>
- ----------------------------
* Based on total assets.
Part I-H-1
<PAGE>
Statement of Additional Information
PART II
Part II of this SAI describes policies and practices that apply to each of the
Funds in the MFS Family of Funds. References in this Part II to a "Fund" means
each Fund in the MFS Family of Funds, unless noted otherwise. References in this
Part II to a "Trust" means the Massachusetts business trust of which the Fund is
a series, or, if the Fund is not a series of a Massachusetts business trust,
references to a "Trust" shall mean the Fund.
TABLE OF CONTENTS
PAGE
1. MANAGEMENT OF THE FUND...................................... 3
Trustees/Officers..................................... 3
Investment Adviser.................................... 3
Administrator......................................... 4
Custodian............................................. 4
Shareholder Servicing Agent........................... 4
Distributor........................................... 4
2. PRINCIPAL SHARE CHARACTERISTICS............................. 4
Class A Shares........................................ 4
Class B Shares, Class C Shares and Class I Shares..... 5
Waiver of Sales Charges............................... 5
Dealer Commissions and Concessions.................... 5
General............................................... 5
3. DISTRIBUTION PLAN........................................... 5
Features Common to Each Class of Shares............... 5
Features Unique to Each Class of Shares............... 6
General............................................... 7
4. INVESTMENT TECHNIQUES, PRACTICES AND RISKS.................. 7
5. NET INCOME AND DISTRIBUTIONS 7
Money Market Funds.................................... 7
Other Funds........................................... 8
6. TAX CONSIDERATIONS.......................................... 8
Taxation of the Fund.................................. 8
Taxation of Shareholders.............................. 8
Special Rules for Municipal Fund Distributions........ 10
7. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS............ 11
8. DETERMINATION OF NET ASSET VALUE............................ 12
Money Market Funds.................................... 12
Other Funds........................................... 12
9. PERFORMANCE INFORMATION..................................... 13
Money Market Funds.................................... 13
Other Funds........................................... 13
General............................................... 14
MFS Firsts............................................ 15
<PAGE>
PAGE
10. SHAREHOLDER SERVICES........................................ 16
Investment and Withdrawal Programs/Features........... 16
Exchange Privilege.................................... 18
Tax-Deferred Retirement Plans......................... 19
11. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES........ 20
APPENDIX A Waivers of Sales Charges.................. A-1
APPENDIX B Dealer Commissions and Concessions........ B-1
APPENDIX C Investment Techniques, Practices and Risks C-1
<PAGE>
1. MANAGEMENT OF THE FUND
Trustees/Officers
Board Oversight -- The Board of Trustees which oversees the Fund 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.
Trustee Retirement Plan -- The Trust has a retirement plan for Trustees who are
non-interested Trustees and Trustees who are not officers of the Trust. Under
this plan, a Trustee will retire upon reaching a specified age (see Part I -
"Appendix B") ("Retirement Age") 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 his Retirement Age 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. 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.
Indemnification of Trustees and Officers -- The Declaration of Trust of the
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
The Trust has retained Massachusetts Financial Services Company ("MFS" or the
"Adviser") as the Fund's 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.) Financial Services Holdings, Inc., which
in turn is an indirect wholly owned subsidiary of Sun Life of Canada.
MFS has retained, on behalf of certain MFS Funds, sub-investment advisers to
assist MFS in the management of the Fund's assets. A description of these
sub-advisers, the services they provide and their compensation is provided under
the caption "Management of the Fund - Sub-Adviser" in Part I of this SAI for
Funds which use sub-advisers.
Investment Advisory Agreement -- The Adviser manages the Fund pursuant to an
Investment Advisory Agreement (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 Fund[s]."
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 and effecting its
portfolio transactions.
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.
The Advisory Agreement has an initial two year term and continues in effect
thereafter only if such continuance is
Part II - 3
<PAGE>
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" in Part I
of this SAI) 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" in Part I of this SAI), 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. 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.
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.
Shareholder Servicing Agent
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, is the
Fund's shareholder servicing agent, pursuant to an Amended and Restated
Shareholder Servicing Agreement (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, MFSC 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 0.1125%. In addition, MFSC will be reimbursed by the Fund for
certain expenses incurred by MFSC on behalf of the Fund. The Custodian has
contracted with MFSC to perform certain dividend disbursing agent functions for
the Fund.
Distributor
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS, serves as
distributor for the continuous offering of shares of the Fund pursuant to an
Amended and Restated Distribution Agreement (the "Distribution Agreement"). The
Distribution Agreement has an initial two year term and continues 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" in Part I of this SAI) 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.
2. PRINCIPAL SHARE CHARACTERISTICS
Set forth below is a description of Class A, B, C and I shares offered by the
MFS Family of Funds. Some MFS Funds may not offer each class of shares -- see
the Prospectus of the Fund to determine which classes of shares the Fund offers.
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 "How to Purchase, Exchange and
Redeem Shares" in the Prospectus). The sales charge scale set forth in
Part II - 4
<PAGE>
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 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). Certain purchases of Class A shares
may be subject to a 1% CDSC instead of an initial sales charge, as described in
the Fund's 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. Class B and C shares are generally
subject to a CDSC, as described in the Fund's Prospectus.
Waiver of Sales Charges
In certain circumstances, the initial sales charge imposed upon purchases of
Class A shares and the CDSC imposed upon redemptions of Class A, B and C shares
are waived. These circumstances are described in Appendix A of this Part II.
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,
because the sales effort, if any, involved in making such sales is negligible,
or in the case of certain CDSC waivers, because the circumstances surrounding
the redemption of Fund shares were not foreseeable or voluntary.
Dealer Commissions and Concessions
MFD pays commission and provides concessions to dealers that sell Fund shares.
These dealer commissions and concession are described in Appendix B of this Part
II.
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.
3. 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.
In certain circumstances, the fees described below may not be imposed, are being
waived or do not apply to certain MFS Funds. Current distribution and service
fees for each Fund are reflected under the caption "Expense Summary" in the
Prospectus.
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.
Part II - 5
<PAGE>
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.
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. 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). In addition to
the initial sales charge, the dealer also generally receives the ongoing 0.25%
per annum service fee, as discussed above.
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.
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 (0.25% per annum for certain Funds). 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). 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 (0.50% per annum for certain Funds),
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. 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.
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.
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).
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. 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
Part II - 6
<PAGE>
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.
General
The Distribution Plan remains in effect from year to year only if its
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" in Part I of this SAI). 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" in Part I of this SAI) 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.
4. INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth in Appendix C of this Part II is a description of investment
techniques and practices which the MFS Funds may generally use in pursuing their
investment objectives and principal investment policies, and the risks
associated with these investment techniques and practices. The Fund will engage
only in certain of these investment techniques and practices, as identified in
Part I. Investment practices and techniques that are not identified in Part I do
not apply to the Fund.
5. NET INCOME AND DISTRIBUTIONS
Money Market Funds
The net income attributable to each MFS Fund that is a money market fund is
determined each day during which the New York Stock Exchange is open for trading
(see "Determination of Net Asset Value" below for a list of days the Exchange is
closed).
For this purpose, the net income attributable to shares of a money market fund
(from the time of the immediately preceding determination thereof) shall consist
of (i) all interest income accrued on the portfolio assets of the money market
fund, (ii) less all actual and accrued expenses of the money market fund
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 money market fund, if any.
Interest income shall include discount earned (including both original issue and
market discount) on discount paper accrued ratably to the date of maturity.
Since the net income is declared as a dividend each time the net income is
determined, the net asset value per share (i.e., the value of the net assets of
the money market fund divided by the number of shares 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 the shareholder's account.
It is expected that the shares of the money market 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 money market
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 amounts exceeds such
Part II - 7
<PAGE>
declared dividends at the end of the month (or during the month in the case of
an account liquidated in its entirety), the money market fund could reduce the
number of its outstanding shares by treating each shareholder of the money
market fund as having contributed to its capital that number of full and
fractional shares of the money market fund in the account of such shareholder
which represents its proportion of such excess. Each shareholder of the money
market fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the money market fund. This procedure would
permit the net asset value per share of the money market fund to be maintained
at a constant $1.00 per share.
Other Funds
Each MFS Fund other than the MFS money market funds intends to distribute to its
shareholders dividends equal to all of its net investment income with such
frequency as is disclosed in the Fund's prospectus. These Funds' net investment
income consists of non-capital gain income less expenses. In addition, these
Funds intend to distribute net realized short- and long-term capital gains, if
any, at least annually. Shareholders will be informed of the tax consequences of
such distributions, including whether any portion represents a return of
capital, after the end of each calendar year.
6. TAX CONSIDERATIONS
The following discussion is a brief summary of some of the important federal
(and, where noted, state) income tax consequences affecting the Fund and its
shareholders. The discussion is very general and should not be viewed as a
substitute for careful tax planning. Prospective investors are urged to consult
their tax advisors regarding the effect an investment in the Fund may have on
their own tax situation.
Taxation of the Fund
Federal Taxes -- The Fund (even if it is a fund in a Trust with multiple series)
is treated as a separate entity for federal income tax purposes under the
Internal Revenue Code of 1986, as amended (the "Code"). The Fund has elected (or
in the case of a new Fund, intends to elect) to be, and intends to be treated
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 its distributions (as a
percentage of both its overall income and any tax-exempt income), and the
composition of its 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, if any, may be subject to foreign
withholding taxes. If the Fund failed to qualify as a "regulated investment
company" in any year, it would incur regular corporate federal income tax on its
taxable income, and Fund distributions would generally be taxable as ordinary
dividend income to the shareholders.
Massachusetts Taxes -- 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.
Taxation of Shareholders
Tax Treatment of Distributions - In general, shareholders of the Fund normally
will have to pay federal income tax and any state or local income taxes on the
dividends and capital gain distributions they receive from the Fund (see below
for special rules applying to exempt-interest dividends). Dividends from
ordinary income and any distributions from net short-term capital gains and net
gains from certain foreign currency transactions, if any, are taxable to
shareholders as ordinary income for federal income tax purposes whether the
distributions are paid in cash or reinvested in additional shares. Distributions
of net capital gain (i.e., the excess of net long-term capital gain over net
short-term capital loss), whether paid in cash or reinvested in additional
shares, are taxable to shareholders as long-term capital gains for federal
income tax purposes without regard to the length of time the shareholders have
held their shares. Any Fund dividend that is declared in October, November, or
December of any calendar year, payable to shareholders of record in such a
month, and paid during 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, including any distribution of net capital gain or net
short-term capital gain, will have the effect of reducing the per share net
asset value of Fund shares by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution (other than
an exempt-interest dividend) may thus pay the full price for the shares and then
effectively receive a portion of the purchase price back as a taxable
distribution.
Dividends-Received Deduction -- If the Fund receives dividend income from U.S.
corporations, 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
Part II - 8
<PAGE>
limitations, and deducted amounts may be subject to the alternative minimum tax
or result in certain basis adjustments.
Disposition of Shares -- In general, any gain or loss realized upon a
disposition of Fund shares 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. However, any loss realized upon a disposition of Fund shares 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 Fund shares held for 90 days or less 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 any other shares
of an MFS Fund generally sold subject to a sales charge.
Distribution/Accounting Policies -- The Fund's current distribution 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.
Foreign Income Taxes -- Investment income received by the Fund and gains with
respect to 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.
The Fund may or may not be eligible to pass through to shareholders foreign tax
credits with respect to such foreign taxes. If the Fund holds more than 50% of
its assets in foreign stock and securities at the close of its taxable year, it
may elect to "pass through" to it's shareholders foreign income taxes paid by
it. 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 it and thus includable in their gross income for federal
income tax purposes. Shareholders who itemize deductions would then be allowed
to claim a deduction or credit (but not both) on their federal income tax
returns for such amounts, subject to certain limitations. Shareholders who do
not itemize deductions would (subject to such limitations) be able to claim a
credit but not a deduction. No deduction will be permitted to individuals in
computing their alternative minimum tax liability. If the Fund is not eligible,
or does not elect, to "pass through" to it's shareholders foreign income taxes
it has paid, shareholders will not be able to claim any deduction or credit for
any part of the foreign taxes paid by the Fund.
U.S. Taxation of Non-U.S. Persons -- Dividends and certain other payments (but
not including distributions of net capital gains) 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 at that rate (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 over withheld may be recovered
by such persons by filing a claim for refund with the U.S. Internal Revenue
Service within the time period appropriate to such claims.
Backup Withholding -- The Fund is also required in certain circumstances to
apply backup withholding at the rate of 31% on taxable dividends and capital
gain distributions (and redemption proceeds, if applicable) paid to any
non-corporate 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.
Foreign Income Taxation of Non-U.S. Persons -- Distributions received from the
Fund by Non-U.S. Persons may also be subject to tax under the laws of their own
jurisdictions.
State and Local Income Taxes: U.S. Government Securities - Dividends paid by the
Fund that are derived from interest on obligations of the U.S. Government and
certain of its agencies and instrumentalities (but generally not distributions
of capital gains realized upon the disposition of such obligations) may be
exempt from state and local income taxes. The Fund intends to advise
shareholders of the extent, if any, to which its dividends 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.
Certain Specific Investments -- 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.
To distribute this income (as well as non-cash income describe in the next two
paragraphs) and avoid a tax on the Fund, it may be required to liquidate
portfolio securities that it might otherwise have continued to hold, potentially
resulting in additional taxable gain or loss to
Part II - 9
<PAGE>
the Fund. Any 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 for any Fund shareholders that are state or
local governments or other tax-exempt organizations.
Options, Futures Contracts, and Forward Contracts -- The Fund's transactions in
options, Futures Contracts, Forward Contracts, short sales "against the box,"
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 that may alter the effects of these rules. The Fund will limit its
activities in options, Futures Contracts, Forward Contracts, short sales
"against the box" and swaps and related transactions to the extent necessary to
meet the requirements of Subchapter M of the Code.
Foreign Investments -- Special tax considerations apply with respect to foreign
investments by the Fund. Foreign exchange gains and losses realized by the Fund
may be treated as ordinary income and loss. 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, potentially resulting in additional taxable gain or loss
to the fund.
Special Rules for Municipal Fund Shareholders
Tax Exempt Distributions -- The portion of a Municipal Fund's distributions of
net investment income that is attributable to interest from tax-exempt
securities will be designated by the Fund as an "exempt-interest dividend" under
the Code and will generally be exempt from federal income tax in the hands of
shareholders, so long as at least 50% of the total value of the Fund's assets
consists of tax-exempt securities at the close of each quarter of the Fund's
taxable year. Distributions of tax-exempt interest earned from certain
securities may, however, be treated as an item of tax preference for
shareholders under the federal alternative minimum tax, and all exempt-interest
dividends may increase a corporate shareholder's alternative minimum tax. Except
when the Fund provides actual monthly percentage breakdowns, the percentage of
income designated as tax-exempt will be applied uniformly to all distributions
by the Fund of net investment income made during each fiscal year of the Fund
and may differ from the percentage of distributions consisting of tax-exempt
interest in any particular month. Shareholders are required to report
exempt-interest dividends received from the Fund on their federal income tax
returns.
Taxable Distributions -- A Municipal Fund may also earn some net investment
income that is taxable as well as recognize capital gains and losses as a result
of the disposition of securities and from certain options and futures
transactions. Shareholders normally will have to pay federal income tax on the
non-exempt interest dividends and capital gain distributions they receive from
the Fund; however, the Fund does not expect that the non-tax-exempt portion of
its net investment income, if any, will be substantial. That portion of
dividends not designated as tax-exempt, and any distributions from net
short-term capital gain are taxable to 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
tax-exempt interest income, it is expected that no Fund dividends will qualify
for the dividends-received deduction for corporations.
Consequences of Distributions by a Municipal Fund: Effect of Accrued Tax-Exempt
Income - Shareholders redeeming shares after tax-exempt income has been accrued
but not yet declared as a dividend should be aware that a portion of the
proceeds realized upon redemption of the shares will reflect the existence of
such accrued tax-exempt income and that this portion will be subject to tax as a
capital gain even though it would have been tax-exempt had it been declared as a
dividend prior to the redemption. For this reason, shareholders can redeem
shares of the Fund with the least adverse tax consequences immediately after the
third business day of any month, when the Fund declares dividends representing
substantially all the ordinary income (including tax-exempt income) accrued for
that month.
Certain Additional Information for Municipal Fund Shareholders -- Interest on
indebtedness incurred by shareholders to purchase or carry Fund shares will not
be deductible for federal income tax purposes. Exempt-interest dividends are
taken into account in calculating the amount of social security and railroad
retirement benefits that may be subject to federal income tax. Entities or
persons who are "substantial users" (or persons related to "substantial users")
of
Part II - 10
<PAGE>
facilities financed by private activity bonds should consult their tax advisers
before purchasing Fund shares.
Consequences of Redemption of Shares -- Any loss realized on a redemption of
Municipal Fund shares held for six months or less will be disallowed to the
extent of any exempt-interest dividends received with respect to those shares.
If not disallowed, any such loss 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.
State and Local Income Taxes: Municipal Obligations -- The exemption of
exempt-interest dividends for federal income tax purposes does not necessarily
result in exemption under the income tax laws of any state or local taxing
authority. Some states do exempt from tax that portion of an exempt-interest
dividend that represents interest received by a regulated investment company on
its holdings of securities issued by that state and its political subdivisions
and instrumentalities. Therefore, the Fund will report annually to its
shareholders the percentage of interest income earned by it during the preceding
year on Municipal Bonds and will indicate, on a state-by-state basis only, the
source of such income.
7. 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 Trust's 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 Family of Funds) have
directed the Adviser to allocate a total of $54,160 of commission business from
the MFS Family of Funds to the Pershing Division of Donaldson Lufkin &
Part II - 11
<PAGE>
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.
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.
8. DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the New York Stock 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.
Money Market Funds
Portfolio securities of each MFS Fund that is a money market fund are valued at
amortized cost, which the Board of Trustees which oversees the money market fund
has 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 Board of Trustees determines that it does not constitute
fair value for such purposes. Each money market fund will limit its portfolio to
those investments in U.S. dollar-denominated instruments which its 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.
Each money market 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 which oversee each money market fund has
established procedures designed to stabilize its net asset value per share, as
computed for the purposes of sales and redemptions, at $1.00 per share. If the
Board determines 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, it will take corrective action it regards 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.
Other Funds
The following valuation techniques apply to each MFS Fund that is not a money
market fund.
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
Part II - 12
<PAGE>
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.
9. PERFORMANCE INFORMATION
Money Market Funds
Each MFS Fund that is a money market fund will provide current annualized and
effective annualized yield quotations based on the daily dividends of shares of
the money market fund. These quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders.
Any current yield quotation of a money market fund which is used in such a
manner as to be subject to the provisions of Rule 482(d) under the 1933 Act
shall consist of an annualized historical yield, carried at least to the nearest
hundredth of one percent based on a specific seven calendar day period and shall
be calculated by dividing the net change in the value of an account having a
balance of one share of that class at the beginning of the period by the value
of the account at the beginning of the period and multiplying the quotient by
365/7. For this purpose the net change in account value would reflect the value
of additional shares purchased with dividends declared on the original share and
dividends declared on both the original share and any such additional shares,
but would not reflect any realized gains or losses from the sale of securities
or any unrealized appreciation or depreciation on portfolio securities. In
addition, any effective yield quotation of a money market 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 a money
market 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 money market fund's expenses.
Other Funds
Each MFS Fund that is not a money market fund may quote the following
performance results.
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 any applicable CDSC 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
Part II - 13
<PAGE>
reduced by any applicable sales charge 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).
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.
Tax-Equivalent Yield -- The tax-equivalent yield for a class of shares of a Fund
is calculated by determining the rate of return that would have to be achieved
on a fully taxable investment in such shares to produce the after-tax equivalent
of the yield of that class. In calculating tax-equivalent yield, a Fund assumes
certain federal tax brackets for shareholders and does not take into account
state taxes.
Current Distribution Rate -- Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid or
expected to be 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 (i) annualizing the distributions (excluding short-term
capital gains) of the class for a stated period; (ii) adding any short-term
capital gains paid within the immediately preceding twelve-month period; and
(iii) dividing the result by the maximum offering price or net asset value per
share on the last day of the period. 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 may be
calculated over a different period of time. The Fund's current distribution rate
calculation for Class B shares 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 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,
Part II - 14
<PAGE>
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.
The Fund may also use charts, graphs or other presentation formats to illustrate
the historical correlation of its performance to fund categories established by
Morningstar (or other nationally recognized statistical ratings organizations)
and to other MFS Funds.
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.
From time to time, the Fund may also advertise annual returns showing the
cumulative value of an initial investment in the Fund in various amounts over
specified periods, with capital gain and dividend distributions invested in
additional shares or taken in cash, and with no adjustment for any income taxes
(if applicable) payable by shareholders.
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.
Part II - 15
<PAGE>
-- 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(R) Equity
Fund, the first fund to invest principally 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.
10. 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 programs 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 MFSC) 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 MFSC 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, MFSC 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 MFSC. By completing and
signing the Account Application or separate Letter of Intent application, the
shareholder irrevocably appoints MFSC 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. A shareholder must provide MFSC (or his investment dealer
must provide MFD) with information to verify that the
Part II - 16
<PAGE>
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 MFSC 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 MFSC 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. MFSC
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. MFSC 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 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 MFSC 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) shares representing reinvested distributions; (ii) shares representing
undistributed capital gains and income; and (iii) to the extent necessary,
shares representing direct investments subject to the lowest CDSC. 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, MFSC. 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. MFSC 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 MFSC 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 MFSC. 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
Part II - 17
<PAGE>
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 MFSC 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 MFSC 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 MFSC.
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
Part II - 18
<PAGE>
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 "How to Purchase, Exchange and Redeem Shares" 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 -- 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 MFSC) or all the shares in
the account. Each exchange involves the redemption of the shares of the Fund to
be exchanged and the purchase 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 MFSC 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.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or MFSC. 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.
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 imposed from time to time at
the discretion of the Funds in order to protect the Funds.
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, the following:
o Traditional Individual Retirement Accounts (IRAs) (for individuals 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);
o Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);
o Simplified Employee Pension (SEP-IRA) Plans;
o Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
o 403(b) Plans (deferred compensation arrangements for employees of public
School systems and certain non-profit organizations); and
o 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
Part II - 19
<PAGE>
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 MFSC.
11. 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 Declaration of Trust further authorizes
the Trustees to classify or reclassify any series of shares into one or more
classes. 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. 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" in Part I of this SAI). 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.
Part II - 20
<PAGE>
PART II -- 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
o Shares acquired through dividend or capital gain reinvestment; and
o 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
o 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:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o 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
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
4. Involuntary Redemptions (CDSC waiver only)
o 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")
o Death or disability of the IRA owner.
Part II-A-1
<PAGE>
Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer Sponsored
Plans ("ESP Plans")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan;
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o 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 MFSC (the "MFS Participant Recordkeeping System");
and
o 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")
o Death or disability of SRO Plan participant.
6. Certain Transfers of Registration (CDSC waiver only). Shares transferred:
o 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
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by MFSC 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 MFSC.
7. Loan Repayments
o 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
o 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.
Part II-A-2
<PAGE>
2. Investment by Insurance Company Separate Accounts
o Shares acquired by insurance company separate accounts.
3. Retirement Plans
Administrative Services Arrangements
o 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
o 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
o Distributions made on or after the IRA owner has attained the age of
591/2years old; and
o Tax-free returns of excess IRA contributions.
401(a) Plans
o Distributions made on or after the 401(a) Plan participant has attained
the age of 591/2years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP Plans and SRO Plans
o Distributions made on or after the ESP or SRO Plan participant has
attained the age of 591/2years old.
401(a) Plans and ESP Plans
o Where
the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participation Recordkeeping System; and
the retirement plan and/or sponsoring organization demonstrates
to the satisfaction of, and certifies to, MFSC 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 Family of 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 MFSC
on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Family of Funds, or
(b) with respect to plans which establish an account with MFSC prior to
November 1, 1997, in the event that there is a change in law or
regulations which result 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.
Part II-A-3
<PAGE>
4. Purchases of at Least $5 Million (CDSC waiver only)
o Shares acquired of Eligible Funds (as defined below) if the sha
reholder'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
o 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
o 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
o 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 MFSC.).
4. Retirement Plans. Shares redeemed on account of distributions made under the
following circumstances:
IRAs, 401(a) Plans, ESP Plans and SRO Plans
o 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.
o Salary Reduction Simplified Employee Pension Plans ("SAR-SEP Plans")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 701/2years old, but only with respect to the
minimum distribution under applicable Code rules; and
o Death or disability of a SAR-SEP Plan participant.
401(a) and ESP Plans Only (Class B CDSC Waiver Only)
o By a retirement plan whose sponsoring organization subscribes to the
MFS Participant Recordkeeping System and which has established an
account with MFSC 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.
Part II-A-4
<PAGE>
PART II -- APPENDIX B
DEALER COMMISSIONS AND CONCESSIONS
This Appendix describes the various commissions paid and concessions made to
dealers by MFD in connection with the sale of Fund 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.
I. CLASS A SHARES
Purchases Subject to an Initial Sales Charge. For purchases of Class A shares
subject to an initial sales charge, MFD reallows a portion of the initial sales
charge to dealers (which are alike for all dealers), as shown in Appendix D to
Part I of this SAI. The difference between the total amount invested and the sum
of (a) the net proceeds to the Fund and (b) the dealer reallowance, is the
amount of the initial sales charge retained by MFD (as shown in Appendix D to
Part I of this SAI). Because of rounding in the computation of offering price,
the portion of the sales charge retained by MFD 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.
Purchases Subject to a CDSC (but not an Initial Sales Charge). For purchases of
Class A shares subject to a CDSC, MFD pays commissions to dealers on new
investments made through such dealers as follows:
<TABLE>
<S> <C>
Commission Paid by MFD to Dealers Cumulative Purchase Amount
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
</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).
II. CLASS B SHARES
For purchases of Class B shares, 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 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).
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Participant Recordkeeping System and which
has established its account with MFSC on or after July 1, 1996, 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.
III. CLASS C SHARES
For purchases of Class C shares, 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.
Part II-B-1
<PAGE>
IV. ADDITIONAL DEALER COMMISSIONS/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 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 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
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.
Part II-B-2
<PAGE>
PART II -- APPENDIX C
INVESTMENT TECHNIQUES, PRACTICES AND RISKS
Set forth below is a description of investment techniques and practices which
the MFS Funds may generally use in pursuing their investment objectives and
principal investment policies, and the associated risks associated with these
investment techniques and practices. The Fund will engage only in certain of
these investment techniques and practices, as identified in Part I of this SAI.
Investment practices and techniques that are not identified in Part I do not
apply to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
Asset-Backed Securities
The Fund may purchase the following types of asset-backed securities:
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.
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. These 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.
Part II-C-1
<PAGE>
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.
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 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. In the event of an increase in interest
rates which results in a decline in mortgage prepayments, the
anticipated maturity of mortgage pass-through securities held by the
Fund may increase, effectively changing a security which was considered
short or intermediate-term at the time of purchase into a long-term
security. Long-term securities generally fluctuate more widely in
response to changes in interest rates than short or intermediate-term
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." 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 seller/servicers
Part II-C-2
<PAGE>
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. The Fund may also buy mortgage-related securities without
insurance or guarantees.
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 "I0" class) while the
other class will receive all of the principal (the principal-only or
"P0" class). The yield to maturity on an I0 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. 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.
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 depositary 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
The Fund may invest in fixed income securities, such as bonds, notes, debentures
and commercial paper. To the extent the Fund invests in fixed income securities,
its net asset value 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's investment in fixed
income securities with longer terms to maturity are subject to greater
volatility than the Fund's shorter-term obligations.
Part II-C-3
<PAGE>
Foreign Securities Exposure
The Fund may invest in various types of foreign securities, or securities which
provide the Fund with exposure to foreign securities or foreign currencies, as
discussed 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, 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.
Depositary Receipts: The Fund may invest in American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and
other types of depositary receipts. ADRs are certificates 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. GDRs and other types of depositary receipts are
typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S.
company. Generally, ADRs are in registered form and are designed for
use in U.S. securities markets and GDRs are in bearer form and are
designed for use in foreign securities markets. For the purposes of the
Fund's policy to invest a certain percentage of its assets in foreign
securities, the investments of the Fund in ADRs, GDRs and other types
of depositary receipts are deemed to be investments in the underlying
securities.
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. 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
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 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, information available to a U.S. investor will be limited
to the information the foreign issuer is required to disclose in its
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 a foreign currency.
Dollar-Denominated Foreign Debt Securities: The Fund may
invest in dollar-denominated foreign debt securities. Investing in
dollar-denominated foreign debt represents a greater degree of risk
than investing in domestic securities, due to less publicly available
information, less securities regulation, war or expropriation. Special
considerations may include higher brokerage costs and thinner trading
markets. Investments in foreign countries could be affected by other
factors including extended settlement periods.
Part II-C-4
<PAGE>
Emerging Markets: The Fund may invest in securities of
government, government-related, supranational and corporate issuers
located in emerging markets. Such investments entail significant risks
as described below.
Company Debt -- Governments of many emerging market
countries have exercised and continue to exercise substantial
influence over many aspects of the private sector through the
ownership or control of many companies, including some of the
largest in any given country. As a result, government actions
in the future could have a significant effect on economic
conditions in emerging markets, which in turn, may adversely
affect companies in the private sector, general market
conditions and prices and yields of certain of the securities
in the Fund's portfolio. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or
other similar developments have occurred frequently over the
history of certain emerging markets and could adversely affect
the Fund's assets should these conditions recur.
Default; Legal Recourse -- The Fund may have limited
legal recourse in the event of a default with respect to
certain debt obligations it may hold. If the issuer of a fixed
income security owned by the Fund defaults, the Fund may incur
additional expenses to seek recovery. Debt obligations issued
by emerging market governments differ from debt obligations of
private entities; remedies from defaults on debt obligations
issued by emerging market governments, unlike those on private
debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against
private issuers may be limited. The ability to attach assets
to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and
other similar laws applicable to private issuers of debt
obligations may be substantially different from those of other
countries. The political context, expressed as an emerging
market governmental issuer's willingness to meet the terms of
the debt obligation, for example, is of considerable
importance. In addition, no assurance can be given that the
holders of commercial bank debt may not contest payments to
the holders of debt obligations in the event of default under
commercial bank loan agreements.
Foreign Currencies -- The securities in which the
Fund invests may be denominated in foreign currencies and
international currency units and the Fund may invest a portion
of its assets directly in foreign currencies. Accordingly, the
weakening of these currencies and units against the U.S.
dollar may result in a decline in the Fund's asset value.
Some emerging market countries also may have managed
currencies, which are not free floating against the U.S.
dollar. In addition, there is risk that certain emerging
market countries may restrict the free conversion of their
currencies into other currencies. Further, certain emerging
market currencies may not be internationally traded. Certain
of these currencies have experienced a steep devaluation
relative to the U.S. dollar. Any devaluations in the
currencies in which a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund's net
asset value.
Inflation -- Many emerging markets have experienced
substantial, and in some periods extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in
inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain
emerging market countries. In an attempt to control inflation,
wage and price controls have been imposed in certain
countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Liquidity; Trading Volume; Regulatory Oversight --
The securities markets of emerging market countries are
substantially smaller, less developed, less liquid and more
volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less
stringent than U.S. standards. Furthermore, there is a lower
level of monitoring and regulation of the markets and the
activities of investors in such markets.
The limited size of many emerging market securities markets
and limited trading volume in the securities of emerging
market issuers compared to volume of trading in the securities
of U.S. issuers could cause prices to be erratic for reasons
apart from factors that affect the soundness and
competitiveness of the securities issuers. For example,
limited market size may cause prices to be unduly influenced
by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth
fundamental analysis, may decrease the value and liquidity of
portfolio securities.
Part II-C-5
<PAGE>
The risk also exists that an emergency situation may arise in
one or more emerging markets, as a result of which trading of
securities may cease or may be substantially curtailed and
prices for the Fund's securities in such markets may not be
readily available. The Fund may suspend redemption of its
shares for any period during which an emergency exists, as
determined by the Securities and Exchange Commission (the
"SEC"). Accordingly, if the Fund believes that appropriate
circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period
commencing from the Fund's identification of such condition
until the date of the SEC action, the Fund's securities in the
affected markets will be valued at fair value determined in
good faith by or under the direction of the Board of Trustees.
Sovereign Debt -- Investment in sovereign debt can
involve a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or
willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental
entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the
governmental entity's policy towards the International
Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may
also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce
principal and interest on their debt. The commitment on the
part of these governments, agencies and others to make such
disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance
and the timely service of such debtor's obligations. Failure
to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result
in the cancellation of such third parties' commitments to lend
funds to the governmental entity, which may further impair
such debtor's ability or willingness to service its debts in a
timely manner. Consequently, governmental entities may default
on their sovereign debt. Holders of sovereign debt (including
the Fund) may be requested to participate in the rescheduling
of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceedings by which
sovereign debt on which governmental entities have defaulted
may be collected in whole or in part.
Emerging market governmental issuers are among the largest
debtors to commercial banks, foreign governments,
international financial organizations and other financial
institutions. Certain emerging market governmental issuers
have not been able to make payments of interest on or
principal of debt obligations as those payments have come due.
Obligations arising from past restructuring agreements may
affect the economic performance and political and social
stability of those issuers.
The ability of emerging market governmental issuers to make
timely payments on their obligations is likely to be
influenced strongly by the issuer's balance of payments,
including export performance, and its access to international
credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a
decline in the international prices of one or more of those
commodities. Increased protectionism on the part of an
emerging market's trading partners could also adversely affect
the country's exports and tarnish its trade account surplus,
if any. To the extent that emerging markets receive payment
for their exports in currencies other than dollars or
non-emerging market currencies, its ability to make debt
payments denominated in dollars or non-emerging market
currencies could be affected.
To the extent that an emerging market country cannot generate
a trade surplus, it must depend on continuing loans from
foreign governments, multilateral organizations or private
commercial banks, aid payments from foreign governments and on
inflows of foreign investment. The access of emerging markets
to these forms of external funding may not be certain, and a
withdrawal of external funding could adversely affect the
capacity of emerging market country governmental issuers to
make payments on their obligations. In addition, the cost of
servicing emerging market debt obligations can be affected by
a change in international interest rates since the majority of
these obligations carry interest rates that are adjusted
periodically based upon international rates.
Another factor bearing on the ability of emerging market
countries to repay debt obligations is the level of
international reserves of the country. Fluctuations in the
level of these reserves affect the amount of foreign exchange
readily available for external debt payments and thus could
have a bearing on the capacity of emerging market countries to
make payments on these debt obligations.
Part II-C-6
<PAGE>
Withholding -- Income from securities held by the
Fund could be reduced by a withholding tax on the source or
other taxes imposed by the emerging market countries in which
the Fund makes its investments. The Fund's net asset value may
also be affected by changes in the rates or methods of
taxation applicable to the Fund or to entities in which the
Fund has invested. The Adviser will consider the cost of any
taxes in determining whether to acquire any particular
investments, but can provide no assurance that the taxes will
not be subject to change.
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. 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.
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 (to protect its current or
intended investments from fluctuations in currency exchange rates) as well as
for non-hedging purposes. .
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 will also enter into transactions in Forward Contracts for other than
hedging purposes, which presents greater profit potential but also involves
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 occur, which will increase its gross income. Where exchange rates do not
move in the direction or to the extent anticipated, however, the Fund may
sustain losses which will reduce its gross income. Such transactions, therefore,
could be considered speculative and could involve significant risk of loss.
Part II-C-7
<PAGE>
The use by the Fund of Forward Contracts also involves the risks described under
the caption "Special Risk Factors -- Options, Futures and Forward Transactions"
in this Appendix.
Futures Contracts
The Fund may purchase and sell futures contracts ("Futures Contracts") on stock
indices, foreign currencies, interest rates or interest-rate related
instruments, indices of foreign currencies or commodities. The Fund may also
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, foreign currency or
commodity, 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 month in which, in the case of the majority of
commodity, interest rate and foreign currency futures contracts, fixed income
securities or currency are delivered by the seller and paid for by the
purchaser, or on which, in the case of 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, subject to
the correlation risks described below, 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 may be more liquid than the cash market in certain
cases or at certain times, 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.
Part II-C-8
<PAGE>
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.
The use by the Fund of Futures Contracts also involves the risks described under
the caption "Special Risk Factors -- Options, Futures and Forward Transactions"
in this Appendix.
Indexed Securities
The Fund may purchase securities with principal and/or interest payments 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 whose value at maturity or coupon
rate is determined by reference to a specific instrument or statistic. The Fund
may also purchase indexed deposits with similar characteristics. 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. Certain indexed
securities may expose the Fund to the risk of loss of all or a portion of the
principal amount of its investment.
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-sponsored entities.
Inverse Floating Rate Obligations
The Fund may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating thereto
structured to have similar features. In creating such an obligation, a
municipality issues a certain amount of debt and pays a fixed interest rate.
Half of the debt is issued as variable rate short term obligations, the interest
rate of which is reset at short intervals, typically 35 days. The other half of
the debt is issued as inverse floating rate obligations, the interest rate of
which is calculated based on the difference between a multiple of (approximately
two times) the interest paid by the issuer and the interest paid on the
short-term obligation. Under usual circumstances, the holder of the inverse
floating rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create long-term
fixed rate bonds. Because the interest rate on the inverse floating rate
obligation is determined by subtracting the short-term rate from a fixed amount,
the interest rate will decrease as the short-term rate increases and will
increase as the short-term rate decreases. The magnitude of increases and
decreases in the market value of inverse floating rate obligations may be
approximately twice as large as the comparable change in the market value of an
equal principal amount of long-term bonds which bear interest at the rate paid
by the issuer and have similar credit quality, redemption and maturity
provisions.
Investment in Other Investment Companies
Part II-C-9
<PAGE>
The Fund's investment in other investment companies is limited in amount by the
1940 Act so that the Fund may purchase shares in another investment company
unless (i) such a purchase would cause the Fund to own in aggregate more than 3%
of the total outstanding voting stock of the company or (ii) such a purchase
would cause the Fund to have more than 5% of its total assets invested in one
investment company or more than 10% of its total assets invested in aggregate in
all other investment companies. Such investment may also involve the payment of
substantial premiums above the value of such investment companies' portfolio
securities, and the total return on such investment will be reduced by the
operating expenses and fees of such other investment companies, including
advisory fees.
Laddering
As one way of managing the Fund's exposure to interest rate fluctuations, the
Adviser may engage in a portfolio management strategy known as "laddering."
Under this strategy, the Fund will allocate a portion of its assets in
securities with remaining maturities of less than 1 year, a portion of its
assets in securities with remaining maturities of 1 to 2 years, a portion of its
assets in securities with remaining maturities of 2 to 3 years, a portion of its
assets in securities with remaining maturities of 3 to 4 years and a portion of
its assets in securities with remaining maturities of 4 to 5 years. Under normal
market conditions, approximately 50% or more of the assets of the Fund will be
devoted to this strategy. The Adviser will actively manage securities within
each rung of the "ladder." "Laddering" does not require that individual bonds
are held to maturity.
The Adviser believes that "laddering" provides additional stability to the
Fund's portfolio by allocating the Fund's assets across a range of securities
with shorter-term maturities. For example, in periods of rising interest rates
and falling bond prices, the bonds with one- and two-year remaining maturities
generally lose less of their value than bonds with four- and five-year remaining
maturities; conversely, in periods of falling interest rates and corresponding
rising bond prices, the principal value of the bonds with four- and five-year
remaining maturities generally increase more than the bonds with one- and
two-year remaining maturities. Furthermore, with the passage of time, individual
bonds held in the Fund's portfolio tend to become less volatile as the time of
their remaining maturity decreases. In addition, bonds with four- and five-year
remaining maturities generally provide higher income than bonds with one- and
two-year remaining maturities.
"Laddering" does not assure profit and does not protect against loss in a
declining market.
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 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 United States ("U.S.") Treasury
securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. The Fund would have the right to call a
loan and obtain the securities loaned at any time on customary industry
settlement notice (which will 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.
Leveraging Transactions
The Fund may engage in the types of transactions described below, which involve
"leverage" because in each case the Fund receives cash which it can invest in
portfolio securities and has a future obligation to make a payment. The use of
these transactions by the Fund will generally cause its net asset value to
increase or decrease at a greater rate than would otherwise be the case. Any
investment income or gains earned from the portfolio securities purchased with
the proceeds from these transactions which is in excess of the expenses
associated from these transactions can be expected to cause the value of the
Fund's shares and distributions on the Fund's shares to rise more quickly than
would otherwise be the case. Conversely, if the investment income or gains
earned from the portfolio securities purchased with proceeds from these
transactions fail to cover the expenses associated with these transactions, the
value of
Part II-C-10
<PAGE>
the Fund's shares is likely to decrease more quickly than otherwise would be the
case and distributions thereon will be reduced or eliminated. Hence, these
transactions are speculative, involve leverage and increase the risk of owning
or investing in the shares of the Fund. These transactions also increase the
Fund's expenses because of interest and similar payments and administrative
expenses associated with them. Unless the appreciation and income on assets
purchased with proceeds from these transactions exceed the costs associated with
them, the use of these transactions by a Fund would diminish the investment
performance of the Fund compared with what it would have been without using
these transactions.
Bank Borrowings: The Fund may borrow money for investment
purposes from banks and invest the proceeds in accordance with its
investment objectives and policies.
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. 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, and
gains from, the investment of the cash proceeds of the initial sale.
The Fund may also be compensated by receipt of a commitment fee.
If the income and capital gains from the Fund's investment of the cash
from the initial sale do not exceed the income, capital appreciation
and gain or loss that would have been realized on the securities sold
as part of the dollar roll, the use of this technique will diminish the
investment performance of the Fund compared with what the performance
would have been without the use of the dollar rolls. Dollar roll
transactions involve the risk that the market value of the securities
the Fund is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dearer to whom the
Fund sells securities becomes insolvent, the Fund's right to purchase
or repurchase securities may be restricted. Successful use of mortgage
dollar rolls may depend upon the Adviser's ability to correctly predict
interest rates and prepayments. There is no assurance that dollar rolls
can be successfully employed.
Reverse Repurchase Agreements: The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund will
sell securities and receive cash proceeds, subject to its agreement to
repurchase the securities at a later date for a fixed price reflecting
a market rate of interest. There is a risk that the counter party to a
reverse repurchase agreement will be unable or unwilling to complete
the transaction as scheduled, which may result in losses to the Fund.
The Fund will invest the proceeds received under a reverse repurchase
agreement in accordance with its investment objective and policies.
Loans and Other Direct Indebtedness
The Fund may purchase loans and other direct indebtedness. In purchasing a loan,
the 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 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 borrowers 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 lenders 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 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 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
Part II-C-11
<PAGE>
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 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 the Fund will purchase, the Adviser will rely upon its own (and not the
original lending institution's) credit analysis of the borrower. As the 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 the
Fund.
Lower Rated Bonds
The Fund may 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"). No minimum rating standard is required 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 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 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. 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.
Municipal Bonds
The Fund may invest in debt securities 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, the interest on
which is exempt from federal income tax ("Municipal Bonds"). Municipal Bonds
include debt securities which pay interest income that is subject to the
alternative minimum tax. The Fund may invest in Municipal Bonds whose issuers
pay interest on the Bonds from revenues from projects such as multifamily
housing, nursing homes, electric utility systems, hospitals or life care
facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of the
bondholders creates additional risks associated with owning real estate,
including environmental risks.
Part II-C-12
<PAGE>
Housing revenue bonds typically are issued by a state, county or local housing
authority and are secured only by the revenues of mortgages originated by the
authority using the proceeds of the bond issue. Because of the impossibility of
precisely predicting demand for mortgages from the proceeds of such an issue,
there is a risk that the proceeds of the issue will be in excess of demand,
which would result in early retirement of the bonds by the issuer. Moreover,
such housing revenue bonds depend for their repayment upon the cash flow from
the underlying mortgages, which cannot be precisely predicted when the bonds are
issued. Any difference in the actual cash flow from such mortgages from the
assumed cash flow could have an adverse impact upon the ability of the issuer to
make scheduled payments of principal and interest on the bonds, or could result
in early retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds established from
the proceeds of the bonds, assuming certain rates of return on investment of
such reserve funds. If the assumed rates of return are not realized because of
changes in interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate. The
financing of multi-family housing projects is affected by a variety of factors,
including satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound management
of the developments, timely and adequate increases in rents to cover increases
in operating expenses, including taxes, utility rates and maintenance costs,
changes in applicable laws and governmental regulations and social and economic
trends.
Electric utilities face problems in financing large construction programs in
inflationary periods, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty in
obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory problems,
the effect of energy conservation and difficulty of the capital market to absorb
utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing for
the elderly which offer residents the independence of condominium life style
and, if needed, the comprehensive care of nursing home services. Bonds to
finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to accurately forecast inflationary cost pressures weighs importantly
in this process. The facilities may also be affected by regulatory cost
restrictions applied to health care delivery in general, particularly state
regulations or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing facilities in
the private or public sector. Hospital bond ratings are often based on
feasibility studies which contain projections of expenses, revenues and
occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management capabilities, economic
developments in the service area, efforts by insurers and government agencies to
limit rates and expenses, confidence in the hospital, service area economic
developments, competition, availability and expense of malpractice insurance,
Medicaid and Medicare funding, and possible federal legislation limiting the
rates of increase of hospital charges.
The Fund may invest in municipal lease securities. These are undivided interests
in a portion of an obligation in the from of a lease or installment purchase
which is issued by state and local governments to acquire equipment and
facilities. Municipal leases frequently have special risks not normally
associated with general obligation or revenue bonds. Leases and installment
purchase or conditional sale contracts (which normally provide for title to the
leased asset to pass eventually to the governmental issuer) have evolved as a
means for governmental issuers to acquire property and equipment without meeting
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the inclusion
in many leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. Although the obligations
will be secured by the leased equipment or facilities, the disposition of the
property in the event of non-appropriation or foreclosure might, in some cases,
prove difficult. There are, of course, variations in the security of municipal
lease securities, both within a particular classification and between
classifications, depending on numerous factors.
The Fund may also invest in bonds for industrial and other projects, such as
sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes and
wastes involved in these projects may include hazardous components, there are
risks associated with their production, handling and disposal.
Part II-C-13
<PAGE>
Non-Diversified Status
The Fund has registered as a "non-diversified" investment company. As a result,
under the 1940 Act, the Fund is limited only by its own investment restrictions
as to the percentage of its assets which may be invested in the securities of
any one issuer. However, in spite of the flexibility under the 1940 Act, the
Fund would still have to meet quarterly diversification requirements under the
Internal Revenue Code of 1986, as amended (the "Code") in order for the Fund to
qualify as a regulated investment company. (See "Tax Considerations" Part II of
this SAI for more information.) As a result of the Code's diversification
requirements, the Fund may not have the latitude to take full advantage of the
relative absence of 1940 Act diversification requirements.
Options
The Fund may invest in the following types of options, which involves the risks
described under the caption "Special Risk Factors - Option, Futures and Forward
Transactions" in this Appendix:
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 effect 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.
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
Part II-C-14
<PAGE>
case of a call option, or a corresponding long position in the case
of a put option. In the event that an option is
exercised, the parties will be subject to all the risks associated with
the trading of Futures Contracts, such as payment of initial and
variation margin deposits. In addition, the writer of an Option on a
Futures Contract, unlike the holder, is subject to initial and
variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase
or sale transaction, subject to the availability of a liquid secondary
market, which is the purchase or sale of an option of the same Fund
(i.e., the same exercise price and expiration date) as the option
previously purchased or sold. The difference between the premiums paid
and received represents the trader's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by 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 Commodity 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 Fund owns
liquid and unencumbered assets equal to the difference. The Fund may
cover the writing of put Options on Futures Contracts (a) through sales
of the underlying Futures Contract, (b) through the ownership of liquid
and unencumbered assets 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 (i) is equal to or
greater than the exercise price of the put written or where the
exercise price of the put held (ii) is less than the exercise price of
the put written if the Fund owns liquid and unencumbered assets equal
to the difference. 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 than
purchasing the underlying Futures Contracts.
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.
Part II-C-15
<PAGE>
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 if the Fund owns liquid and unencumbered
assets equal to the amount of cash consideration) 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 Fund owns liquid and unencumbered assets equal to the
difference. A put option written by the Fund is "covered" if the Fund
owns liquid and unencumbered assets with a value equal to the exercise
price, 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 Fund owns liquid and unencumbered
assets equal to the difference. 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 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.
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 Fund owns liquid and
unencumbered 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.
Part II-C-16
<PAGE>
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.
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 generally 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 written 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 if
the Fund owns liquid and unencumbered assets equal to the amount of
cash consideration) 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 Fund owns liquid and unencumbered assets equal to the
difference. The Fund may cover put options on stock indices by owning
liquid and unencumbered assets with a value equal to the exercise
price, 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 (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 Fund owns liquid and unencumbered assets equal to the difference.
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
Part II-C-17
<PAGE>
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 it 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.
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.
"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
Part II-C-18
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 owns liquid and
unencumbered 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.
Repurchase Agreements
The Fund may enter into repurchase agreements with sellers who are member firms
(or a subsidiary thereof) of the New York Stock Exchange or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the 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.
Restricted Securities
The Fund may purchase securities that are not registered under the Securities
Act of 1933, as amended ("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") and commercial paper issued under
Section 4(2) of the 1933 Act ("4(2) Paper"). A determination is made, based upon
a continuing review of the trading markets for the Rule 144A security or 4(2)
Paper, whether such security is liquid and thus not subject to the Fund's
limitation on investing 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 and 4(2) Paper. The Board,
however, retains oversight of the liquidity determinations 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 these Rule 144A securities held in the Fund's
portfolio. Subject to the Fund's 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.
Short Sales
The Fund may seek to hedge investments or realize additional gains through short
sales. The Fund may make short sales, which are transactions in which the 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
Part II-C-19
<PAGE>
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.
Whenever the Fund engages in short sales, it identifies liquid and unencumbered
assets in an amount that, when combined with the amount of collateral deposited
with the broker connection with the short sale, equals the current market value
of the security sold short.
In addition, the Fund also may make short sales "against the box," i.e., when a
security identical to one owned by the Fund is borrowed and sold short. If the
Fund enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required to
hold such securities while the short sale is outstanding. The Fund will incur
transaction costs, including interest, in connection with opening, maintaining,
and closing short sales against the box.
Special 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 currencies
other than those 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.
Part II-C-20
<PAGE>
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, 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 and unencumbered assets necessary to satisfy
an option exercise will be identified, unless the option is 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. 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
Part II-C-21
<PAGE>
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.
Potential Bankruptcy of a Clearinghouse or Broker: When the
Fund enters into transactions in exchange-traded futures or options, it
is exposed to the risk of the potential bankruptcy of the relevant
exchange clearinghouse or the broker through which the Fund has
effected the transaction. In that event, the Fund might not be able to
recover amounts deposited as margin, or amounts owed to the Fund in
connection with its transactions, for an indefinite period of time, and
could sustain losses of a portion or all of such amounts, Moreover, the
performance guarantee of an exchange clearinghouse generally extends
only to its members and the Fund could sustain losses, notwithstanding
such guarantee, in the event of the bankruptcy of its broker.
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.
Part II-C-22
<PAGE>
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 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
Part II-C-23
<PAGE>
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.
Speculative Bonds
The 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.
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 provide
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 the Adviser
determines it is consistent with the Fund's investment objective and policies.
The Fund will maintain liquid and unencumbered assets 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 and unencumbered assets 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 and unencumbered 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.
Part II-C-24
<PAGE>
Temporary Borrowings
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities) in an amount
not exceeding 5% of the value of its total assets at the time the loan is made.
Temporary Defensive Positions
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.
U.S. Government Securities
The Fund may invest in U.S. Government Securities including (i) U.S. Treasury
obligations, all of which are backed by the full faith and credit of the U.S.
Government and (ii) U.S. Government Securities, 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 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").
U.S. Government Securities also include interest in trust or other entities
representing interests in obligations that are issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities.
Variable and Floating Rate Obligations
The Fund may invest in floating or variable rate securities. Investments in
floating or variable rate securities normally will involve industrial
development or revenue bonds which provide that the rate of interest is set as a
specific percentage of a designated base rate, such as rates on Treasury Bonds
or Bills or the prime rate at a major commercial bank, and that a bondholder can
demand payment of the obligations on behalf of the Fund on short notice at par
plus accrued interest, which amount may be more or less than the amount the
bondholder paid for them. The maturity of floating or variable rate obligations
(including participation interests therein) is deemed to be the longer of (i)
the notice period required before the Fund is entitled to receive payment of the
obligation upon demand or (ii) the period remaining until the obligation's next
interest rate adjustment. If not redeemed by the Fund through the demand
feature, the obligations mature on a specified date which may range up to thirty
years from the date of issuance.
Warrants
The Fund may invest in warrants. Warrants are securities that give the Fund the
right to purchase equity securities from the issuer at a specific price (the
"strike price') for a limited period of time. The strike price of warrants
typically is much lower than the current market price of the underlying
securities, yet they are subject to similar price fluctuations. As a result,
warrants may be more volatile investments than the underlying securities and may
offer greater potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if it
is not exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
"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, a Fund will identify liquid and unencumbered assets equal to its
forward delivery commitment.
Part II-C-25
<PAGE>
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. The 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 the Fund's distribution obligations.
Part II-C-26
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R) Strategic Growth Fund
500 Boylston Street
Boston, MA 02116
[MFS LOGO] MSG-13-4/97/500
<PAGE>
MFS SERIES TRUST I
MFS STRATEGIC GROWTH FUND
PART C
Item 23. Financial Statements and Exhibits
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*
* Incorporated by reference to the Annual Report to Shareholders dated
August 31, 1997, filed with the SEC on October 29, 1997.
(b) Exhibits:
1 (a) Amended and Restated Declaration of
Trust, dated January 6, 1995. (4)
<PAGE>
(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)
(h) Amendment to Declaration of Trust,
dated February 19, 1998 to add a new
series. (16)
2 Amended and Restated By-Laws dated
December 14, 1994. (4)
3 Form of Share Certificate for Classes of
shares. (7)
4 (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)
<PAGE>
(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. (14)
(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)
(n) Investment Advisory Agreement for
MFS(R) Real Estate Investment Fund,
dated March 16, 1998. (16)
5 (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)
6 Retirement Plan for Non-Interested
Person Trustees, dated January 1, 1991.
(5)
7 (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)
<PAGE>
(c) Amendment No. 2 to the Custodian
Agreement, dated October 9, 1991. (5)
8 (a) Shareholder Servicing Agent Agreement,
dated September 10, 1986. (5)
(b) Amendment to Shareholder Servicing
Agent Agreement to amend fee
schedule, dated January 1, 1998. (16)
(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, as
amended. (9)
9 Consent and Opinion of Counsel, dated
December 22, 1997. (14)
10 (a) Auditor's Consent Letter for Deloitte &
Touche LLP regarding MFS Managed
Sectors Fund and MFS Cash Reserve
Fund. (14)
(b) Auditor's Consent Letter for Ernst &
Young LLP regarding MFS World Asset
Allocation Fund. (14)
(c) Auditor's Consent Letter for Ernst &
Young LLP regarding MFS Equity Income
Fund, MFS New Discovery Fund and MFS
Research International Fund. (14)
(d) Auditor's Consent Letter for Ernst &
Young LLP regarding MFS Research
Growth and Income Fund. (14)
<PAGE>
(e) Auditor's Consent Letter for Ernst &
Young LLP regarding MFS Strategic
Growth Fund. (14)
(f) Auditors Consent Letter for Ernst & Young
LLP regarding MFS Core Growth Fund, MFS
Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund and MFS
Science and Technology Fund. (16)
11 Not Applicable.
12 Not Applicable.
13 Master Distribution Plan pursuant to
Rule 12b-1 under the Investment
Company Act of 1940 effective January
1, 1997, as amended and restated May
27, 1998. (17)
14 Financial Data Schedules; filed herewith
15 Plan pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940, as
amended and restated May 27, 1998.
(17)
Power of Attorney, dated August 19,
1994. (5)
Power of Attorney, dated February 19,
1998. (16)
(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 Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective No. 65 filed with the SEC
via EDGAR on March 11, 1998.
(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.
<PAGE>
(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.
(14) Incorporated by reference to the Registrant's Post-Effective Amendment No.
29 filed with the SEC on December 24, 1997.
(15) Incorporated by reference to MFS Series Trust VIII (File Nos. 33-37972 and
811-5262) Post-Effective Amendment No. 14 filed with the SEC via EDGAR on
February 26, 1998.
(16) Incorporated by reference to the Registrant's Post-Effective Amendment No.
30 filed with the SEC via EDGAR on March 11, 1998.
(17) Incorporated by reference to MFS Series Trust II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 27 filed with the SEC via EDGAR on
May 29, 1998.
Item 24. Persons Controlled by or under Common Control
with Registrant
Not applicable.
Item 25. 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 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 26. Business and Other Connections of Investment
Adviser
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds (except the Vertex Funds mentioned
below): 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 Strategic 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
<PAGE>
Market Fund, MFS Government Money Market Fund, MFS Municipal Bond Fund and MFS
Mid Cap Growth Fund), MFS Series Trust V (which has six series: MFS Total Return
Fund, MFS Research Fund, MFS International Opportunities Fund, MFS International
Strategic Growth Fund, MFS International Value Fund and MFS Asia Pacific 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
eight series: MFS Government Mortgage Fund, MFS/Foreign & Colonial Emerging
Markets Equity Fund, MFS International Growth Fund, MFS International Growth and
Income Fund, MFS Real Estate Investment Fund, MFS Strategic Value Fund, MFS
Small Cap Value Fund and MFS Emerging Markets Debt Fund), MFS Series Trust XI
(which has six series: MFS Union Standard Equity Fund, Vertex All Cap Fund,
Vertex Research All Cap Fund, Vertex Growth Fund, Vertex Discovery Fund and
Vertex Contrarian Fund (the Vertex Funds are expected to be declared effective
April 28, 1998)), 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
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series) and
MFS Variable Insurance Trust ("MVI") (which has thirteen series). The principal
business address of each of the aforementioned funds is 500 Boylston Street,
Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the 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") (which has 26 series), 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 (collectively, the
"Accounts"). The principal business address of MFS/SL is 500 Boylston Street,
Boston, Massachusetts 02116. The principal business
<PAGE>
address of each of the aforementioned Accounts is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and
a wholly owned subsidiary of MFS, whose principal business address is 500
Boylston Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment
adviser to Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth
Fund, Vertex Discovery Fund and Vertex Contrarian Fund, each a series of MFS
Series Trust XI. The principal business address of the aforementioned Funds is
500 Boylston Street, Boston, Massachusetts 02116.
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 Governments 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, MFS Meridian Emerging Markets Debt Fund, MFS
Meridian Strategic Growth Fund and MFS Meridian World Asset Allocation 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 Institutional Advisors (Australia) Ltd. ("MFSI-
Australia"), a private limited company organized under the Corporations Law of
New South Wales, Australia
<PAGE>
whose current address is Level 37, Governor Phillip Tower, One Farrer Place,
Sydney, N5W2000, Australia, is involved primarily in investment management and
distribution of Australian superannuation unit trusts and acts as an investment
adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a
private limited company organized pursuant to the Corporations Law of New South
Wales, Australia whose current address is Level 37, Governor Phillip Tower, One
Farrer Place, Sydney, NSW2000 Australia, and whose function is to serve
primarily as a holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned
subsidiary of MFS, serves as distributor for the MFS Funds, MVI and MFSIT.
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 and MVI.
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 Jeffrey L. Shames, Arnold D. Scott,
John W. Ballen, Kevin R. Parke, Thomas J. Cashman, Jr., Joseph W. Dello Russo,
William W. Scott, Donald A. Stewart and John D. McNeil. Mr. Shames is the
Chairman and Chief Executive Officer, Mr. Ballen is President and Chief
Investment Officer, Mr. Arnold Scott is a Senior Executive Vice President and
Secretary, Mr. William Scott, Mr. Cashman, Mr. Dello Russo and Mr. Parke are
Executive Vice Presidents (Mr. Parke is also Chief Equity Officer), 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.
<PAGE>
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
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
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 Government Markets Income Trust
MFS Intermediate Income Trust
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
James T. Swanson, Robert J. Manning 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.
<PAGE>
MFS Series Trust IV
MFS Series Trust IX
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
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
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson
and John D. Laupheimer, Jr., a Senior 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
Robert A. Dennis is Vice President, David B. Smith and
Geoffrey L. Schechter, Vice 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 Series Trust XI
MFS Institutional Trust
Jeffrey L. Shames is the President and 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>
MFS Municipal Income Trust
Robert J. Manning is 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 Multimarket Income Trust
MFS Charter Income Trust
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
Robert J. Manning is 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/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.
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.
Vertex
Jeffrey L. Shames and Arnold D. Scott are the Directors,
Jeffrey L. Shames is the President, Kevin R. Parke and John W. Ballen are
Executive Vice Presidents, John
<PAGE>
F. Brennan, Jr., and John D. Laupheimer are Senior Vice Presidents, Brian E.
Stack is a 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.
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman,
Jr. are Directors, Stephen E. Cavan is a Director, Senior Vice President and
the 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
Thomas J. Cashman, Jr. is President and a Director, Arnold
D. Scott and Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director
and the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - Australia
Thomas J. Cashman, Jr. is President and a Director, Graham
E. Lenzer, John A. Gee and David Adiseshan are Directors, Stephen E. Cavan is
the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is
the Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS Holdings - Australia
Jeffrey L. Shames is the President and a Director, Arnold D.
Scott, Thomas J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E.
Cavan is the Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, and Robert T. Burns is the Assistant
Secretary.
MIL Funds
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 O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE>
MFS Meridian Funds
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
Arnold D. Scott and Jeffrey L. Shames are Directors, William
W. Scott, Jr., an Executive Vice President of MFS, is the President, Stephen
E. Cavan is the Secretary, Robert T. Burns is the Assistant Secretary, Joseph
W. Dello Russo is the Treasurer, and Thomas B. Hastings is the Assistant
Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph
A. Recomendes, a Senior Vice President and Chief Information Officer of MFS,
is Vice Chairman and a Director, Janet A. Clifford is the 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
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, Kevin R. Parke is
the Executive Vice President and a Managing Director, George F. Bennett, Jr.,
John A. Gee, Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor 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
Arnold D. Scott is the Chairman and a Director, Martin E.
Beaulieu is the President, William W. Scott, Jr. is a Director, 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.
<PAGE>
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
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 27. Distributors
(a) Reference is hereby made to Item 26 above.
(b) Reference is hereby made to Item 26 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not Applicable.
Item 28. 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
<PAGE>
State Street Bank and Trust CompanyState Street South
(custodian) 5-West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
Item 29. Management Services
Not applicable.
Item 30. 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 25 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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 17th day of September, 1998.
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 September 17, 1998.
SIGNATURE TITLE
STEPHEN E. CAVAN* Principal Executive Officer
Stephen E. Cavan
W. THOMAS LONDON* Treasurer (Principal Financial
W. Thomas London Officer and Principal Accounting Officer)
RICHARD B. BAILEY* Trustee
Richard B. Bailey
MARSHALL N. COHAN* Trustee
Marshall N. Cohan
LAWRENCE H. COHN, M.D.* Trustee
Lawrence H. Cohn, M.D.
SIR J. DAVID GIBBONS* Trustee
Sir J. David Gibbons
<PAGE>
ABBY M. O'NEILL* Trustee
Abby M. O'Neill
WALTER E. ROBB, III* Trustee
Walter E. Robb, III
ARNOLD D. SCOTT* Trustee
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
Jeffrey L. Shames
J. DALE SHERRATT* Trustee
J. Dale Sherratt
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 (i) a
Power of Attorney dated August 11,
1994,incorporated by reference to
Registrant's Post- Effective Amendment No.
21 filed with the Securities and Exchange
Commission via EDGAR on October 17, 1995,
and (ii) a Power of Attorney dated February
19, 1998, incorporated by reference to the
Registrant's Post-Effective Amendment No. 30
filed with the Securities and Exchange
Commission via EDGAR on March 11, 1998.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
14 Financial Data Schedules.
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<CIK> 0000798244
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<NAME> MFS STRATEGIC GROWTH FUND CLASS A
<S> <C>
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<NUMBER-OF-SHARES-SOLD> 1208172
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<TABLE> <S> <C>
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<NAME> MFS SERIES TRUST I
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<S> <C>
<PERIOD-TYPE> YEAR
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<PER-SHARE-NAV-BEGIN> 12.53
<PER-SHARE-NII> (0.09)
<PER-SHARE-GAIN-APPREC> 4.31
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<AVG-DEBT-OUTSTANDING> 0
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</TABLE>
<TABLE> <S> <C>
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<NAME> MFS SERIES TRUST I
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
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<S> <C>
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<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
