<PAGE> 1
MFS(R) MANAGED SECTORS FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
This supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2000. 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 "Description of Share Classes" below.
1. RISK RETURN SUMMARY
Performance Table. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's performance
over time. The table is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
<S> <C> <C> <C>
Class I shares 11.85% 15.89% 15.81%
S&P 500#+ 28.58% 24.06% 19.21%
Lipper Capital Appreciation Fund Index##++ 19.97% 16.25% 15.71%
Average capital appreciation fund## 20.49% 15.02% 14.08%
</TABLE>
- --------------------------
# Source: Standard & Poor's Micropal, Inc.
## Source: Lipper Analytical Services, Inc.
+ The Standard and Poor's 500 Composite Index (S&P500) is a broad-based,
unmanaged commonly used measure of common stock total return performance.
It is composed of 500 widely held common stocks listed on New York Stock
Exchange, American Stock Exchange, and over-the-counter market.
++ The Lipper Mutual Fund Indices are unmanaged, broad-based,
net-asset-value-weighted indices of the largest qualifying mutual funds
within their respective investment objectives, adjusted for the
reinvestment of capital gain distributions and income dividends.
The fund commenced investment operations on December 29, 1986 with the offering
of class B shares, and subsequently offered class I shares on January 2, 1997.
Class I share performance includes the performance of the fund's class B shares
for periods prior to the offering of class I shares. This blended class I share
performance has been adjusted to take into account the fact that class I shares
have no CDSC. This blended performance has not been adjusted to take into
account differences in class specific operating expenses. Because operating
expenses of class I shares are lower than those of class B shares, this blended
class I share performance is lower than the performance of class I shares would
have been had class I shares been offered for the entire period.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
<PAGE> 2
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):
<TABLE>
<CAPTION>
<S> <C>
Management Fees......................................................... 0.75%
Distribution and Service (12b-1) Fees................................... None
Other Expenses.......................................................... 0.26%
====
Total Annual Fund Operating Expenses(1)................................. 1.01%
</TABLE>
- --------------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent and the fund may enter into other
similar arrangements and directed brokerage arrangements (which would also
have the effect of reducing the fund's expenses). Any such fee reductions
are not reflected in the table. Had these fee reductions been taken into
account, "Total Operating Expenses" would be 0.99% for class I shares.
3. EXAMPLE OF EXPENSES
The "Example of Expenses" table is intended to help you compare the cost of
investing in the fund with the cost of investing in other mutual funds.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
<PAGE> 3
The table is supplemented as follows:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class I shares $103 $322 $558 $1,236
</TABLE>
4. DESCRIPTIONS OF SHARE CLASSES
The "Description of Share Classes" 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, and;
- 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.
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.
5. 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.
6. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is intended to help you understand the fund's
financial performance. It is supplemented as follows:
FINANCIAL STATEMENTS - CLASS I SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
8/31/99 8/31/98 8/31/97*
---------- ---------- ------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.10 $ 16.86 $ 13.18
------- ------- -------
Income from investment operations# -
Net investment loss $ (0.03) $ (0.07) $ (0.07)
Net realized and unrealized gain(loss) on investments and
foreign currency 5.72 (2.50) 3.75
------- ------- -------
Total from investment operations $ 5.69 $ (2.57) $ 3.68
------- ------- -------
Less distributions declared to shareholders from net realized gain on
investments and foreign currency transactions $ (1.80) $ (3.19) $ --
------- ------- -------
Net asset value - end of period $ 14.99 $ 11.10 $ 16.86
------- ------- -------
Total return 55.45% (17.72)% 27.92%++
Ratios (to average net assets)Supplemental data:
Expenses## 1.01% 1.02% 1.07%+
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net investment loss (0.21)% (0.44)% (0.65)%+
Portfolio turnover 334% 112% 96%
Net assets at end of period (000 omitted) $ 2,829 $ 1,756 $ 2,349
</TABLE>
- ----------------------------------------
* For the period from the inception of Class I, January 2, 1997, through
August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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's expenses are calculated
without reduction for this expense offset arrangement.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000.
<PAGE> 5
[MFS MANAGED
SECTORS FUND
JANUARY 1, 2000]
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
- ------------------------------------------------------------
This Prospectus describes the MFS(R) Managed Sectors Fund.
The investment objective of the fund is capital
appreciation.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary...................................... 1
II Expense Summary.......................................... 6
III Certain Investment Strategies and Risks.................. 8
IV Management of the Fund................................... 9
V Description of Share Classes............................. 10
VI How to Purchase, Exchange and Redeem Shares.............. 14
VII Investor Services and Programs........................... 18
VIII Other Information........................................ 20
IX Financial Highlights..................................... 23
Appendix A -- Investment Techniques and Practices........ A-1
</TABLE>
<PAGE> 7
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's investment objective is capital appreciation. The fund's
objective may be changed without shareholder approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its total
assets in common stocks and related securities, such as preferred stock,
convertible securities and depositary receipts of companies in 13 industry
sectors. The fund chooses its investments from the following 13 sectors:
autos and housing; basic materials; consumer staples; defense and
aerospace; energy; financial services; health care; industrial goods and
services; leisure; retailing; technology; transportation; and utilities.
The fund may also invest in new sectors from time to time. The fund
generally focuses on four or five sectors at any one time, and may invest a
maximum of 50% of its net assets in any one sector. The fund adds or
eliminates a sector from its portfolio by considering the sector's economic
cycle and sensitivity to interest rates. The fund's investments may include
securities traded in the over-the-counter markets.
The fund's investments in the foreign securities sector may include
emerging markets securities. The fund may also have exposure to foreign
currencies through its investment in these securities, its direct holdings
of foreign currencies or through its use of foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign
currency at a future date.
Massachusetts Financial Services Company (referred to as MFS or the
adviser) 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 (such as
an analysis of earnings, cash flows, competitive position and management's
abilities) performed by the fund's portfolio manager and MFS' large group
of equity research analysts.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in a small number of
issuers.
The fund has engaged and may engage in active and frequent trading to
achieve its principal investment strategies.
-- PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
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.
1
<PAGE> 8
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 disappointing earnings results.
- Company Risk: Prices of securities react to the economic condition of
the company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
- Allocation Risk: The fund will allocate its investments among various
equity sectors, based upon judgments made by MFS. The fund could miss
attractive investment opportunities by underweighting sectors where there
are significant returns, and could lose value by overweighting sectors
where there are significant declines.
- Active or Frequent Trading Risk: The fund has engaged and 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 as compared to a fund with less
active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could detract
from the fund's performance.
- Non-Diversified Status Risk: Because the fund may invest its assets in a
small number of issuers, the fund is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
- Concentration Risk: Because the fund may invest to a significant degree
in securities of companies in a limited number of sectors, the fund's
performance is particularly sensitive to changes in the value of
securities in these sectors. A decline in the value of these types of
securities may result in a decline in the fund's net asset value and your
investment.
- Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in
smaller volume than exchange-listed stocks. The values of these stocks
may be more volatile than exchange-listed stocks, and the fund may
experience difficulty in establishing or closing out positions in these
stocks at prevailing market prices.
- Foreign Securities Risk: 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.
2
<PAGE> 9
- 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, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. 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. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in the fund's foreign currency
holdings. By entering into forward foreign currency exchange
contracts, the fund may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of forward
contracts entered into for the purpose of increasing return, the
fund may sustain losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk that the party
with which the fund enters the contract may fail to perform its
obligations to the fund.
- Emerging Markets Risk: 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 market countries have been more volatile
than the markets of developed countries with more mature economies.
These markets often have provided significantly higher or lower
rates of return than developed markets, and significantly greater
risks, to investors.
- 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.
-- 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 changes in the fund's
performance over
3
<PAGE> 10
time. The performance table also shows how the fund's performance over time
compares with that of one or more broad measures of market performance. 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
B shares. The chart and related notes do not take into account any sales
charges (loads) 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 B returns shown in the bar
chart, depending upon the expenses of those classes.
[Performance Graph]
<TABLE>
<CAPTION>
CLASS B SHARES
--------------
<S> <C>
1989 39.89%
1990 13.66%
1991 59.57%
1992 3.89%
1993 3.68%
1994 3.54%
1995 32.12%
1996 16.28%
1997 24.74%
1998 10.76%
</TABLE>
The total return for the nine-month period ended September 30, 1999 was
15.77%. During the period shown in the bar chart, the highest quarterly
return was 23.43% (for the calendar quarter ended December 31, 1998) and
the lowest quarterly return was (22.24)% (for the calendar quarter ended
September 30, 1990).
4
<PAGE> 11
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compare to a broad measure of market performance and various other
market indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year
<S> <C> <C> <C>
Class A shares 5.11% 14.85% 15.24%
Class B shares 6.85 15.18 15.57
S&P 500+* 28.58 24.06 19.21
Lipper Capital Appreciation Fund
Index++** 19.97 16.25 15.71
Average capital appreciation fund++ 20.49 15.02 14.08
</TABLE>
- ---------------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Analytical Services, Inc.
* The Standard & Poor's 500 Composite Index (S&P 500) is a broad-based,
unmanaged commonly used measure of common stock total return
performance. It is composed of 500 widely held common stocks listed on
New York Stock Exchange, American Stock Exchange, and the over-the-
counter market.
** The Lipper Mutual Fund Indices are unmanaged, broad-based,
net-asset-value-weighted indices of the largest qualifying mutual funds
within their respective investment objectives, adjusted for the
reinvestment of capital gain distributions and income dividends.
Class A share performance takes into account the deduction of the 5.75%
maximum sales charge. Class B share 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%.
The fund commenced investment operations on December 29, 1986 with the
offering of class B shares and subsequently offered class A shares on
September 20, 1993. Class A share performance includes the performance of
the fund's class B shares for periods prior to the offering of class A
shares. This blended class A share performance has been adjusted to take
into account the initial sales charge (load) applicable to class A shares,
rather than the CDSC applicable to class B shares. This blended performance
has not been adjusted to take into account differences in class specific
operating expenses. Class A share performance generally would have been
higher than class B share performance had class A shares been offered for
the entire period, because certain operating expenses (e.g., distribution
and service fees) attributable to class B shares are higher than those of
class A shares.
5
<PAGE> 12
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering
price)(1)................................. 5.75% 0.00%
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is less)... See Below(1) 4.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
...........................................................................
<TABLE>
<S> <C> <C>
Management Fees........................... 0.75% 0.75%
Distribution and Service (12b-1) Fees(2).. 0.35% 1.00%
Other Expenses............................ 0.26% 0.26%
----- -----
Total Annual Fund Operating Expenses(3)... 1.36% 2.01%
</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 and B 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, and the fund may enter
into other such agreements and directed brokerage arrangements (which
would also have the effect of reducing the fund's expenses). Any such
fee reductions are not reflected in the table. Had these fee reductions
been taken into account, "Total Operating Expenses" would be 1.34% for
class A shares and 1.99% for class B shares.
6
<PAGE> 13
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $706 $981 $1,277 $2,116
Class B shares(1)
Assuming redemption at end of
period 604 931 1,283 2,170
Assuming no redemption 204 631 1,083 2,170
</TABLE>
--------------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A expenses.
7
<PAGE> 14
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
In addition, 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's defensive
investment position may not be effective in protecting its value.
8
<PAGE> 15
IV 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 $122.76 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of
assets in equity securities, approximately $21.2 billion of assets in fixed
income funds and fixed income portfolios and approximately $8.9 billion of
assets in foreign securities. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the Fund paid MFS an annual management fee computed and
paid monthly, in an amount equal to 0.75% of the average daily net assets
of the fund for the fund's fiscal year ended August 31, 1999.
-- PORTFOLIO MANAGER
Toni Shimura, a Senior Vice President of the adviser, has been the fund's
portfolio manager since December 9, 1998. Ms. Shimura has been employed as
a portfolio manager by the adviser since 1987.
-- 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.
-- 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.
9
<PAGE> 16
V DESCRIPTION OF SHARE CLASSES
The fund offers class A and B 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 or B 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 purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), 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>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
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.
10
<PAGE> 17
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.
In addition, 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:
- 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 (referred to as 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;
- 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; and
- the plan has not redeemed its class B shares in the MFS funds in
order to purchase class A shares under this category.
- 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
11
<PAGE> 18
- 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.
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
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.
-- CALCULATION OF CDSC
As discussed above, certain investments in class A and B 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 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.
12
<PAGE> 19
- 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
appreciation or 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, which means that the CDSC will be applied
against the lesser of your direct investment or the total cost of your
shares. The applicability of a CDSC will not be affected by exchanges or
transfers of registration, except as described in the SAI.
-- 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
and B 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 (0.10% distribution fee and 0.25% service fee) and 1.00% for class
B shares (a 0.75% distribution fee and a 0.25% service fee), 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.
13
<PAGE> 20
VI HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
You may purchase, exchange and redeem class A and B 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 by having your financial
adviser process your purchase. The minimum initial investment is $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.
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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC 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.
14
<PAGE> 21
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 may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and policies are described
below under the captions "Right to Reject or Restrict Purchase and Exchange
Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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.
15
<PAGE> 22
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS funds may
consider trading done in multiple accounts under common ownership or
control.
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
16
<PAGE> 23
shares will be subject to a CDSC which will be determined from the date you
originally purchased the shares redeemed.
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.
17
<PAGE> 24
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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 and B 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 a 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
18
<PAGE> 25
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 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 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.
19
<PAGE> 26
VIII 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). The New York Stock Exchange is closed for business on most
national holidays and Good Friday. 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 any
realized net capital gains) to shareholders as dividends at least annually.
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on
your particular tax situation.
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.
20
<PAGE> 27
You will normally have to pay federal income taxes, and any state or local
taxes, on the distributions you receive from the fund, whether you take the
distributions in cash or reinvest them in additional shares. Distributions
designated as capital gain dividends are taxable as long-term capital
gains. Other distributions 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.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if 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 will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to the fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding. Prospective investors should read the fund's
Account Application for additional information regarding backup withholding
of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
-- YEAR 2000 READINESS DISCLOSURE
The fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not
21
<PAGE> 28
properly process date-related information from and after January 1, 2000.
MFS recognizes the importance of the Year 2000 issue and, to address Year
2000 compliance, created a separately funded Year 2000 Program Management
Office in 1996 comprised of a specialized staff reporting directly to MFS
senior management. The Office, with the help of external consultants, is
responsible for overall coordination, strategy formulation, communications
and issue resolution with respect to Year 2000 issues. While MFS systems
will be tested for Year 2000 readiness before the turn of the century,
there are significant systems interdependencies in the domestic and foreign
markets for securities, the business environments in which companies held
by the fund operate and in MFS' own business environment. MFS has been
working with the fund's other service providers to identify and respond to
potential problems with respect to Year 2000 readiness and to develop
contingency plans. Year 2000 readiness is also one of the factors
considered by MFS in its ongoing assessment of companies in which the fund
invests. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the fund.
-- 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.
22
<PAGE> 29
IX FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
fund's financial performance for the past five years. 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. The fund's Annual
Report is available upon request by contacting MFSC (see back cover for
address and telephone number). These financial statements are incorporated
by reference into the SAI. The fund's independent auditors are Deloitte &
Touche LLP.
23
<PAGE> 30
CLASS A SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data
(for a share outstanding
throughout each period):
Net asset value --
beginning of period $ 11.06 $ 16.81 $ 13.16 $ 15.55 $ 13.41
-------- -------- -------- -------- --------
Income from investment
operations# --
Net investment loss $ (0.08) $ (0.12) $ (0.13) $ (0.08) $ (0.05)
Net realized and
unrealized gain (loss) on
investments and foreign
currency 5.72 (2.49) 5.46 0.58 3.22
-------- -------- -------- -------- --------
Total from investment
operations $ 5.64 $ (2.61) $ 5.33 $ 0.50 $ 3.17
-------- -------- -------- -------- --------
Less distributions
declared to shareholders
from net realized gain on
investments and foreign
currency transactions $ (1.75) $ (3.14) $ (1.68) $ (2.89) $ (1.03)
-------- -------- -------- -------- --------
Net asset value -- end of
period $ 14.95 $ 11.06 $ 16.81 $ 13.16 $ 15.55
======== ======== ======== ======== ========
Total return++ 54.92% (18.04)% 43.92% 3.92% 26.12%
Ratios (to average net
assets)/ Supplemental data:
Expenses## 1.36% 1.38% 1.43% 1.43% 1.46%
Net investment loss (0.57)% (0.79)% (0.93)% (0.56)% (0.34)%
Portfolio turnover 334% 112% 96% 117% 115%
Net assets at end of period
(000 omitted) $326,805 $227,348 $288,227 $207,504 $178,367
</TABLE>
--------------
++ Total returns for class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
# Per share data are based on average shares outstanding.
## 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. For fiscal years
ending after September 1, 1995, the fund's expenses are calculated
without reduction for this expense offset arrangement.
24
<PAGE> 31
CLASS B SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data
(for a share outstanding
throughout each period):
Net asset value --
beginning of period $ 11.08 $ 16.81 $ 13.14 $ 15.46 $ 13.35
-------- ------- -------- -------- --------
Income from investment
operations# --
Net investment loss $ (0.17) $ (0.22) $ (0.23) $ (0.18) $ (0.14)
Net realized and
unrealized gain (loss) on
investments and foreign
currency 5.75 (2.48) 5.47 0.58 3.20
-------- ------- -------- -------- --------
Total from investment
operations $ 5.58 $ (2.70) $ 5.24 $ 0.40 $ 3.06
-------- ------- -------- -------- --------
Less distributions
declared to shareholders
from net realized gain on
investments and foreign
currency transactions $ (1.62) $ (3.03) $ (1.57) $ (2.72) $ (0.95)
-------- ------- -------- -------- --------
Net asset value -- end of
period $ 15.04 $ 11.08 $ 16.81 $ 13.14 $ 15.46
======== ======= ======== ======== ========
Total return 53.89% (18.52)% 42.95% 3.17% 25.19%
Ratios (to average net
assets)/ Supplemental data:
Expenses## 2.01% 2.02% 2.11% 2.15% 2.18%
Net investment loss (1.22)% (1.43)% (1.60)% (1.27)% (1.06)%
Portfolio turnover 334% 112% 96% 117% 115%
Net assets at end of period
(000 omitted) $127,024 $97,682 $157,052 $129,858 $199,773
</TABLE>
--------------
# Per share data are based on average shares outstanding.
## 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. For fiscal years ending
after September 1, 1995, the fund's expenses are calculated without
reduction for this expense offset arrangement.
25
<PAGE> 32
APPENDIX A
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<CAPTION>
<S> <C>
SYMBOLS X permitted -- not permitted
---------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities --
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities X
Variable and Floating Rate
Obligations X
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds X
Equity Securities X
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts X
Dollar-Denominated Foreign Debt
Securities --
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
</TABLE>
A-1
<PAGE> 33
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
................................................................................
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds --*
Closed-End Funds X
Lending of Portfolio Securities X
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies X
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options --
"Yield Curve" Options --
Repurchase Agreements X
Restricted Securities X
Short Sales --*
Short Sales Against the Box X
Short Term Instruments X
Swaps and Related Derivative Instruments --
Temporary Borrowings X
Temporary Defensive Positions X
Warrants X
"When-issued" Securities X
</TABLE>
- ---------
* May only be changed with shareholder approval.
A-2
<PAGE> 34
MFS(R) MANAGED SECTORS 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 January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
MMS-1 12/99 197M 08/208/808
<PAGE> 35
<TABLE>
<S> <C> <C>
[MFS 75 YEARS LOGO] STATEMENT OF ADDITIONAL [MFS MANAGED
INFORMATION SECTORS FUND
A SERIES OF MFS SERIES TRUST I LOGO]
500 BOYLSTON STREET, BOSTON, MA 02116 JANUARY 1, 2000
(617) 954-5000
This Statement of Additional Information, as This SAI is divided into two Parts -- Part I and
amended or supplemented from time to time (the Part II. Part I contains information that is
"SAI"), sets forth information which may be of particular to the Fund, while Part II contains
interest to investors but which is not information that generally applies to each of
necessarily included in the Fund's Prospectus the funds in the MFS Family of Funds (the "MFS
dated January 1, 2000. This SAI should be read Funds"). Each Part of the SAI has a variety of
in conjunction with the Prospectus. The Fund's appendices which can be found at the end of Part
financial statements are incorporated into this I and Part II, respectively.
SAI by reference to the Fund's most recent
Annual Report to shareholders. A copy of the THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED
Annual Report accompanies this SAI. You may FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY
obtain a copy of the Fund's Prospectus and IF PRECEDED OR ACCOMPANIED BY A CURRENT
Annual Report without charge by contacting MFS PROSPECTUS.
Service Center, Inc. (see back cover of Part II
of this SAI for address and phone number).
</TABLE>
MMS-13 12/99 600
<PAGE> 36
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 1
VIII Tax Considerations.......................................... 3
IX Independent Auditors and Financial Statements............... 3
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 -- Description of Industry Sectors............... H-1
</TABLE>
<PAGE> 37
I DEFINITIONS
"Fund" -- MFS Managed Sectors Fund, a non-diversified series of MFS Series Trust
I (the "Trust"), a Massachusetts business trust organized in 1986. The Fund was
known as MFS Lifetime Managed Sectors Fund prior to June 3, 1993 and as Lifetime
Managed Sectors Trust prior to August 3, 1992. The Fund was reorganized as a
series of the Trust on June 3, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated January 1, 2000, as amended or
supplemented from time to time.
II MANAGEMENT OF THE FUND
THE FUND
The Fund is a non-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.
III 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.
IV 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.
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 certain other MFS funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS Funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
V 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.
VI 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.
VII 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. A more detailed description of the 13 industry
sectors from which the Fund chooses its investments appears in Appendix H of
Part I of this SAI.
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 A to the Prospectus, and are more fully described, together with
their associated risks, in Part II of this SAI.
The following percentage limitations apply to the following investment
techniques and practices:
- - Foreign Securities up to but not including 50% of net assets.
- - Lending of Portfolio Securities may not exceed 30% of net assets.
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
Part I -- 1
<PAGE> 38
lesser of (i) more than 50% of the outstanding shares of the Trust or of a class
or series, as applicable, or (ii) 67% or more of the outstanding shares of the
Trust or of a series or class, as applicable, present at a meeting if holders of
more than 50% of the outstanding shares of the Trust or a series or class, as
applicable, are represented in person or by proxy). Except for Investment
Restriction (1) below and the Fund's non-fundamental investment policy regarding
illiquid securities, these investment restrictions and policies are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy. In the
event of a violation of nonfundamental investment policy (1), the Fund will
reduce the percentage of its assets invested in illiquid investments in due
course, taking into account the best interests of shareholders.
The Fund may not:
(1) Borrow amounts in excess of 33 1/3% of its assets, and then only as a
temporary measure for extraordinary or emergency purposes, or pledge,
mortgage or hypothecate an amount of its assets (taken at market value) in
excess of 15% of its total assets, in each case taken at the lower of cost
or market value. For the purpose of this restriction, collateral
arrangements with respect to options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign currencies,
and payments of initial and variation margin in connection therewith, are
not considered a pledge of assets.
(2) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
in selling a portfolio security.
(3) Purchase or sell real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein and securities secured by
real estate), or mineral leases, commodities or commodity contracts
(except contracts for the future or forward delivery of securities or
foreign currencies and related options and except Futures Contracts and
Options on Futures Contracts) in the ordinary course of its business. The
Fund reserves the freedom of action to hold and to sell real estate or
mineral leases, commodities or commodity contracts acquired as a result of
the ownership of securities.
(4) Make loans to other persons except by the purchase of obligations in which
the Fund is authorized to invest and by entering into repurchase
agreements; provided that the Fund may lend its portfolio securities
representing not in excess of 30% of its total assets (taken at market
value). Not more than 10% of the Fund's total assets (taken at market
value) may be invested in repurchase agreements maturing in more than
seven days. The Fund may purchase all or a portion of an issue of debt
securities distributed privately to financial institutions. For these
purposes the purchase of short-term commercial paper or a portion or all
of an issue of debt securities which are part of an issue to the public
shall not be considered the making of a loan.
(5) Purchase the securities of any issuer if (as to 50% of the value of its
total assets) such purchase, at the time thereof, would cause more than 5%
of its total assets (taken at market value) to be invested in the
securities of such issuer, other than U.S. Government securities.
(6) Purchase voting securities of any issuer if (as to 50% of the value of its
total assets) such purchase, at the time thereof, would cause more than
10% of the outstanding voting securities of such issuer to be held by the
Fund. For this purpose all indebtedness of an issuer shall be deemed a
single class and all preferred stock of an issuer shall be deemed a single
class.
(7) Invest for the purpose of exercising control or management.
(8) Purchase or retain in its portfolio any securities issued by an issuer any
of whose officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is a member, partner, officer or Director of
the Adviser, if after the purchase of the securities of such issuer by the
Fund one or more of such persons owns beneficially more than 1/2 of 1% of
the shares or securities, or both, all taken at market value, of such
issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value.
(9) Purchase any securities or evidences of interest therein on margin, except
that the Fund may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of securities and the Fund may make
margin deposits in connection with options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign currencies.
(10) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities without payment of further consideration equivalent in kind and
amount to the securities sold and provided that if such right is
conditional the sale is made upon equivalent conditions.
(11) Purchase securities issued by any other registered investment company or
investment trust except by purchase in the open market where no commission
or profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not
made in the open market, is part of a plan of merger or consolidation;
provided, however, that the Fund will not purchase such securities if such
purchase at the time thereof would cause more than 10% of its total assets
(taken at market value) to be invested in the securities of such issuers;
and, provided further, that the Fund will not
Part I -- 2
<PAGE> 39
purchase securities issued by an open-end investment company.
(12) Write, purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the Fund from writing, purchasing and
selling puts, calls or combinations thereof with respect to securities,
indexes of securities or foreign currencies, and with respect to Futures
Contracts.
(13) Issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder. For the purposes of this restriction,
collateral arrangements with respect to options, Futures Contracts and
Options on Futures Contracts and collateral arrangements with respect to
initial and variation margins are not deemed to be the issuance of a
senior security.
In addition, the Fund has the following non-fundamental policy which may be
changed without shareholder approval. The Fund will not:
(1) Knowingly invest in securities which are subject to legal or contractual
restrictions on resale (other than repurchase agreements), unless the
Board of Trustees has determined that such securities are liquid based
upon trading markets for the specific security, if, as a result thereof,
more than 15% of the Fund's net assets (taken at market value) would be so
invested.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for the two years ended August 31, 1999,
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 Deloitte
& Touche LLP, independent auditors, given upon their authority as experts in
accounting and auditing. A copy of the Annual Report accompanies this SAI.
Part I -- 3
<PAGE> 40
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 and President (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.
Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor.
Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer.
Address: 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: 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), Cambridge Nutraceuticals (professional nutritional products), Chief
Executive Officer.
Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director.
Address: 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, Senior Vice President.
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996).
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (prior to March 1997).
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-1
<PAGE> 41
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 $1,250 per year
plus $225 per meeting and $225 per committee meeting attended, together with
such Trustee's out-of-pocket expenses. 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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT TOTAL
TRUSTEE BENEFIT ESTIMATED TRUSTEE FEES
FEES ACCRUED CREDITED FROM FUND AND
FROM AS PART OF YEARS OF FUND
TRUSTEE FUND(1) FUND EXPENSE(1) SERVICE(2) COMPLEX(3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,500 $1,370 10 $259,430
Marshall N. Cohan 3,950 2,087 14 143,259
Lawrence H. Cohn, M.D. 3,995 1,122 18 153,579
The Honorable Sir J. David Gibbons, KBE 3,500 1,825 13 130,059
Abby M. O'Neill 3,500 1,225 10 130,059
Walter E. Robb, III 4,670 2,707 15 171,154
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 4,387 1,431 20 157,714
Ward Smith 3,937 1,617 13 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ended August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- -----------------------------------------------
<S> <C> <C> <C> <C>
$3,150 $473 $ 788 $1,103 $1,575
3,547 532 887 1,242 1,774
3,945 592 986 1,381 1,972
4,342 651 1,086 1,520 2,171
4,740 711 1,185 1,659 2,370
5,137 771 1,284 1,798 2,569
</TABLE>
- -------------------------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-1
<PAGE> 42
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $3,202,009 N/A $54,164 $456,066 N/A $3,712,239
August 31, 1998 3,384,634 N/A 63,971 533,909 N/A 3,982,514
August 31, 1997 2,864,061 N/A 29,828* 553,167 N/A 3,447,056
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 43
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
August 31, 1999 $249,838 $35,944 $213,894 $1,852 $131,551
August 31, 1998 204,162 30,155 174,007 311 104,962
August 31, 1997 156,344 20,163 136,181 190 101,980
</TABLE>
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>
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
<S> <C>
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, 1999, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
----------------------------------------------------------
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $1,058,870 $378,272 $680,598
Class B Shares 1,221,287 940,116 281,171
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE> 44
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $2,139,216
August 31, 1998 1,173,426
August 31, 1997 811,980
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- --------------------------------------------------------------
<S> <C>
Chase Manhattan Corp. $4,460,544
Morgan Stanley Dean Witter & Co. 403,319
</TABLE>
Part I -- E-1
<PAGE> 45
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 30, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares.
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 September 30, 1999, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
..........................................................................................
<S> <C>
TRS MFS DEF Contribution Plan 100% of Class I Shares
c/o Mark Leary
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
</TABLE>
Part I -- F-1
<PAGE> 46
PART I - APPENDIX G
PERFORMANCE INFORMATION
................................................................................
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURNS
ACTUAL 30-
DAY YIELD 30-DAY YIELD CURRENT
--------------------------- (INCLUDING (WITHOUT ANY Distribution
1 YEAR 5 YEARS 10 YEARS WAIVERS) WAIVERS) RATE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (5.75%) 46.01% 17.68% 13.09% N/A N/A N/A
Class A Shares, at net asset value 54.92% 19.08% 13.76% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) 49.89% 18.08% 13.36% N/A N/A N/A
Class B Shares, at net asset value 53.89% 18.28% 13.36% N/A N/A N/A
Class I Shares, at net asset value 55.45% 18.93% 13.67% N/A N/A N/A
</TABLE>
- -------------------------------
The Fund commenced investment operations on December 29, 1986 with the offering
of class B shares and subsequently offered class A shares on September 20, 1993
and class I shares on January 2, 1997. Class A share performance includes the
performance of the Fund's class B shares for periods prior to the offering of
class A shares. This blended class A share performance has been adjusted to take
into account the initial sales charge (load) applicable to class A shares,
rather than CDSC applicable to class B shares. This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Class A share performance generally would have been higher than class
B share performance had class A shares been offered for the entire period,
because certain operating expenses (e.g., distribution and service fees)
attributable to class B shares are higher than those of class A shares.
Class I share performance includes the performance of the Fund's class B shares
for periods prior to the offering of class I shares. This blended class I share
performance has been adjusted to take into account the fact that class I shares
have no CDSC. This blended performance has not been adjusted to take into
account differences in class specific operating expenses. Because operating
expenses of class I shares are lower than those of class B shares, this blended
class I share performance is lower than the performance of class I shares would
have been had class I shares been offered for the entire period.
Part I -- G-1
<PAGE> 47
PART I - APPENDIX H
DESCRIPTION OF INDUSTRY SECTORS
The Fund seeks to achieve its investment objective by varying the weighting of
its portfolio among the following 13 industry sectors (i.e., industry
groupings).
(1) AUTOS AND HOUSING SECTOR: companies engaged in the design, production and
sale of automobiles, automobile parts, mobile homes and related products, and in
the design, construction, renovation and refurbishing of residential dwellings.
The value of automobile industry securities is affected by foreign competition,
consumer confidence, consumer debt and installment loan rates. The housing
construction industry is affected by the level of consumer confidence, consumer
debt, mortgage rates and the inflation outlook.
(2) BASIC MATERIALS AND CONSUMER STAPLES SECTOR: companies engaged in providing
consumer goods and services such as: the design, processing, production and
storage of packaged, canned, bottled and frozen foods and beverages; and the
design, production and sale of home furnishings, appliances, clothing,
accessories, cosmetics and perfumes. Certain such companies are subject to
government regulation affecting the permissibility of using various food
additives and production methods, which regulations could affect company
profitability. Also, the success of food- and fashion-related products may be
strongly affected by fads, marketing campaigns and other factors affecting
supply and demand.
(3) DEFENSE AND AEROSPACE SECTOR: companies engaged in the research, manufacture
or sale of products or services related to the defense and aerospace industries,
such as: air transport; data processing or computer-related services;
communications systems; military weapons and transportation; general aviation
equipment, missiles, space launch vehicles and spacecraft; units for guidance,
propulsion and control of flight vehicles; and airborne and ground-based
equipment essential to the test, operation and maintenance of flight vehicles.
Since such companies rely largely on U.S. (and other) governmental demand for
their products and services, their financial conditions are heavily influenced
by federal (and other governmental) defense spending policies.
(4) ENERGY SECTOR: companies in the energy field, including oil, gas,
electricity and coal as well as nuclear, geo-thermal, oil shale and solar
sources of energy. The business activities of companies comprising this sector
may include: production, generation, transmission, marketing, control or
measurement of energy or energy fuels; provision of component parts or services
to companies engaged in such activities; energy research or experimentation;
environmental activities related to the solution of energy problems; and
activities resulting from technological advances or research discoveries in the
energy field. The value of such companies' securities varies based on the price
and supply of energy fuels and may be affected by events relating to
international politics, energy conservation, the success of exploration
projects, and the tax and other regulatory policies of various governments.
(5) FINANCIAL SERVICES SECTOR: companies providing financial services to
consumers and industry, such as: commercial banks and savings and loan
associations; consumer and industrial finance companies; securities brokerage
companies; leasing companies; and firms in all segments of the insurance field
(such as multiline, property and casualty, and life insurance). These kinds of
companies are subject to extensive governmental regulations, some of which
regulations are currently being studied by Congress. The profitability of these
groups may fluctuate significantly as a result of volatile interest rates and
general economic conditions.
(6) HEALTH CARE SECTOR: companies engaged in the design, manufacture or sale of
products or services used in connection with health care or medicine, such as:
pharmaceutical companies; firms that design, manufacture, sell or supply
medical, dental and optical products, hardware or services; companies involved
in biotechnology, medical diagnostic and biochemical research and development;
and companies involved in the operation of health care facilities. Many of these
companies are subject to government regulation, which could affect the price and
availability of their products and services. Also, products and services in this
sector could quickly become obsolete.
(7) INDUSTRIAL GOODS AND SERVICES SECTOR: companies engaged in the research,
development, manufacture or marketing of products, processes or services related
to the agriculture, chemicals, containers, forest products, non-ferrous metals,
steel and pollution control industries, such as: synthetic and natural
materials, for example, chemicals, plastics, fertilizers, gases, fibers,
flavorings and fragrances; paper; wood products; steel and cement. Certain
companies in this sector are subject to regulation by state and federal
authorities, which could require alteration or cessation of production of a
product, payment of fines or cleaning of a disposal site. In addition, since
some of the materials and processes used by these companies involve hazardous
components, there are risks associated with their production, handling and
disposal. The risk of product obsolescence is also present.
(8) LEISURE SECTOR: companies engaged in the design, production or distribution
of goods or services in the leisure industry, such as: television and radio
broadcast or manufacture; motion pictures and photography; recordings and
musical instruments; publishing; sporting goods, camping and recreational
equipment; sports arenas; toys and games; amusement and theme parks;
travel-related services and airlines; hotels and motels; fast food and other
restaurants; and gaming casinos. Many products produced by companies in this
sector -- for example, video and electronic games -- may quickly become
obsolete.
Part I -- H-1
<PAGE> 48
(9) RETAILING SECTOR: companies engaged in the retail distribution of home
furnishings, food products, clothing, pharmaceuticals, leisure products and
other consumer goods, such as: department stores; supermarkets; and retail
chains specializing in particular items such as shoes, toys or pharmaceuticals.
The value of securities in this sector will fluctuate based on consumer spending
patterns, which depend on inflation and interest rates, level of consumer debt
and seasonal shopping habits. The success or failure of a particular company in
this highly competitive sector will depend on such company's ability to predict
rapidly changing consumer tastes.
(10) TECHNOLOGY SECTOR: companies which are expected to have or develop
products, processes or services which will provide or will benefit significantly
from technological advances and improvements or future automation trends in the
office and factory, such as: semiconductors; computers and peripheral equipment;
scientific instruments; computer software; telecommunications; and electronic
components, instruments and systems. Such companies are sensitive to foreign
competition and import tariffs. Also, many products produced by companies in
this sector may quickly become obsolete.
(11) TRANSPORTATION SECTOR: companies involved in the provision of
transportation of people and products, such as: airlines, railroads and trucking
firms. Revenues of companies in this sector will be affected by fluctuations in
fuel prices resulting from domestic and international events, and government
regulation of fares.
(12) UTILITIES SECTOR: companies in the public utilities industry and companies
deriving a substantial majority of their revenues through supplying public
utilities such as: companies engaged in the manufacture, production, generation,
transmission and sale of gas and electric energy; and companies engaged in the
communications field, including telephone, telegraph, satellite, microwave and
the provision of other communication facilities to the public. The gas and
electric public utilities industries are subject to various uncertainties,
including the outcome of political issues concerning the environment, prices of
fuel for electric generation, availability of natural gas, and risks associated
with the construction and operation of nuclear power facilities.
(13) FOREIGN SECTOR: companies whose primary business activity takes place
outside of the United States. The securities of foreign companies are heavily
influenced by the strength of national economies, inflation levels and the value
of the U.S. dollar versus foreign currencies. Investments in the Foreign Sector
will be subject to certain risks not generally associated with domestic
investments.
Diversified companies will generally be included in the sector of their
predominant industry activity, as determined by the Adviser.
Part I -- H-2
<PAGE> 49
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE> 50
[MFS CASH
RESERVE FUND
JANUARY 1, 2000]
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------
This Prospectus describes the MFS(R) Cash Reserve Fund. The
investment objective of the fund is to seek as high a level
of current income as is considered consistent with the
preservation of capital and liquidity.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 51
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary...................................... 1
II Expense Summary.......................................... 5
III Certain Investment Strategies and Risks.................. 7
IV Management of the Fund................................... 8
V Description of Share Classes............................. 9
VI How to Purchase, Exchange and Redeem Shares.............. 11
VII Investor Services and Programs........................... 15
VIII Other Information........................................ 17
IX Financial Highlights..................................... 20
Appendix A -- Investment Techniques and Practices........ A-1
</TABLE>
<PAGE> 52
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's investment objective is to seek as high a level of current
income as is considered consistent with the preservation of capital and
liquidity. The fund's objective may be changed without shareholder
approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund is a money market fund, meaning it tries to maintain a share price
of $1.00 while paying income to its shareholders. The fund invests in money
market instruments, which are short-term notes or other debt securities
issued by banks or other corporations, or the U.S. Government or other
governmental entities. Under normal market conditions, the fund invests at
least 80% of its total assets in the following money market investments:
- U.S. Government securities, which are bonds or other debt obligations
issued by, or whose principal and interest payments are guaranteed by,
the U.S. Government or one of its agencies or instrumentalities;
- Repurchase agreements collateralized by U.S. Government securities;
- Certificates of deposit, bankers' acceptances and other bank obligations,
provided that the bank obligations are insured by the Federal Deposit
Insurance Corporation or the issuing bank has capital, surplus, and
undivided profits in excess of $100 million;
- Commercial paper which is rated within the highest credit rating by one
or more rating agencies or which is unrated and considered by the fund's
investment adviser, Massachusetts Financial Services Company (referred to
as MFS or the adviser) to be of comparable quality; and
- Short-term corporate obligations which are rated within the two highest
credit ratings by one or more rating agencies.
The fund may invest up to 20% of its total assets in short-term notes or
other debt securities not specifically described in the list above that are
of comparable high quality and liquidity. These securities may include U.S.
dollar-denominated securities of foreign issuers, including foreign
companies, foreign governments and sovereign entities (such as government
agencies), foreign banks and U.S. branches of foreign banks. These
securities will be rated in the two highest credit ratings by rating
agencies or unrated and considered by MFS to be of comparable quality.
A money market fund must follow strict rules as to the investment quality,
maturity, diversification and other features of the securities it
purchases. Money market instruments purchased by the fund have maturities
of 13 months or less, and the average remaining maturity of the securities
cannot be greater than 90 days.
1
<PAGE> 53
-- PRINCIPAL RISKS OF AN INVESTMENT
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. 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:
- Money Market Instruments Risk: Money market instruments provide
opportunities for income with low credit risk, but may result in a lower
yield than would be available from debt obligations of a lower quality or
longer term. Although the fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing
in the fund.
- Foreign Markets Risk: Although the fund's investments in foreign issuers
involve relatively low credit risk, an investment in the fund may involve
a greater degree of risk than an investment in a fund that invests only
in debt obligations of U.S. domestic issuers. Investing in foreign
securities involves 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.
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.
-- 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 changes in 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.
2
<PAGE> 54
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
B shares. The chart and related notes do not take into account any sales
charges (loads) 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 B returns shown in the bar
chart, depending upon the expenses of those classes.
[Performance Graph]
<TABLE>
<CAPTION>
<S> <C>
1989 7.28%
1990 6.21%
1991 4.26%
1992 1.64%
1993 1.20%
1994 2.35%
1995 3.97%
1996 3.54%
1997 3.65%
1998 3.74%
</TABLE>
The total return for the nine-month period ended September 30, 1999 was
3.18%.
During the period shown in the bar chart, the highest quarterly return was
1.92% (for the calendar quarter ended June 30, 1989) and the lowest
quarterly return was 0.24% (for the calendar quarter ended September 30,
1993).
3
<PAGE> 55
PERFORMANCE TABLE
This table shows the average annual total returns of each class of the fund
for certain periods and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year 5 Year 10 Year
<S> <C> <C> <C>
Class A shares 4.79% 4.53% 4.35%
Class B shares (0.26)% 3.10% 3.77%
Class C shares 2.66% 3.45% 3.77%
</TABLE>
Class B share 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 share performance takes into
account the deduction of the 1% CDSC.
The fund commenced investment operations on December 29, 1986 with the
offering of class B shares and subsequently offered class A shares on
September 7, 1993 and class C shares on April 1, 1996. Class A and C share
performance includes the performance of the fund's class B shares for
periods prior to the offering of class A and C shares. The blended class A
share performance has been adjusted to take into account the fact that
class A shares have no initial sales charge or CDSC. The blended class C
share performance has been adjusted to take into account the lower CDSC
applicable to class C shares rather than the CDSC applicable to class B
shares. This blended performance has not been adjusted to take into account
differences in class specific operating expenses. Because operating
expenses for class A shares are lower than those of class B shares, this
blended class A performance is lower than the performance of class A shares
would have been had class A shares been offered for the entire period.
Because operating expenses of class C shares are approximately the same as
class B shares, this blended class C performance is approximately the same
as the performance of class C shares would have been had class C shares
been offered for the entire period.
If you would like the fund's current yield, contact the MFS Service Center
at the toll-free number set forth on the back cover page.
4
<PAGE> 56
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price)... None None None
Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds, whichever
is less)........................ None 4.00% 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
...........................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees................. 0.55% 0.55% 0.55%
Distribution and Service (12b-1)
Fees(1)....................... 0.00% 1.00% 1.00%
Other Expenses.................. 0.37% 0.37% 0.37%
----- ----- ----
Total Annual Fund Operating
Expenses...................... 0.92% 1.92% 1.92%
Fee Waiver(2)......... (0.10)% (0.10)% (0.10)%
----- ----- ----
Net Expenses(3)....... 0.82% 1.82% 1.82%
</TABLE>
--------------
(1) 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).
(2) MFS has contractually agreed to reduce its management fee to 0.45%
annually of the average daily net assets of the fund. This contractual
fee arrangement will remain in effect until at least January 1, 2001,
absent an earlier modification approved by the board of trustees which
oversees the fund.
(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, and may enter into other
such agreements and directed brokerage arrangements (which would also
have the effect of reducing the fund's expenses). Any such fee
reductions are not reflected in the table. Had these fee reductions
been taken into account, "Total Annual Fund Operating Expenses" would
have been 0.80% for class A shares, 1.80% for class B shares and 1.80%
for class C shares.
5
<PAGE> 57
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's
total expenses are assumed to be the fund's "Net Expenses" for the first
year, and the fund's "Total Annual Fund Operating Expenses" for
subsequent years (see the table on page 5).
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ 84 $283 $ 500 $1,122
Class B shares(1)
Assuming redemption at end of
period 585 893 1,227 1,974
Assuming no redemption 185 593 1,027 1,974
Class C shares
Assuming redemption at end of
period 285 593 1,027 2,235
Assuming no redemption 185 593 1,027 2,235
</TABLE>
--------------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A expenses.
6
<PAGE> 58
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
In addition, 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's defensive
investment position may not be effective in protecting its value.
7
<PAGE> 59
IV 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 $122.76 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of
assets in equity securities, approximately $21.2 billion of assets in fixed
income funds and fixed income portfolios and approximately $8.9 billion of
assets in foreign securities. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the fund pays MFS an annual management fee computed and
paid monthly, in an amount equal to 0.55% of the average daily net assets
of the fund, although the adviser has contractually agreed to waive its
right to receive a portion of its fee as described under "Expense Summary."
For the fund's fiscal year ended August 31, 1999, MFS received management
fees of 0.45% of the fund's average daily net assets.
-- PORTFOLIO MANAGER
Jean O. Alessandro is the portfolio manager and an Assistant Vice President
of the adviser. Ms. Alessandro has been employed as a portfolio manager by
the adviser 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.
-- 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.
8
<PAGE> 60
V DESCRIPTION OF SHARE CLASSES
The fund offers class A, B and C shares through this prospectus.
-- SALES CHARGES
You may be subject to a CDSC when you redeem class 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 purchase class A shares at net asset value, without an initial
sales charge or CDSC. It is anticipated that the net asset value of $1.00
per share will remain constant. While there is no sales charge, your
financial adviser may charge you for their services in connection with
purchasing fund shares. Class A shares have annual distribution and service
fees up to a maximum of 0.35% of net assets annually.
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
9
<PAGE> 61
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 the fund's class B and C shares
will be subject to a CDSC. Different aging schedules apply to the
calculation of the CDSC:
- 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
appreciation or 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, which means that the CDSC will be applied
against the lesser of your direct investment or the total cost of your
shares. The applicability of a CDSC will not be affected by exchanges or
transfers of registration, except as described in the SAI.
-- 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 (0.10% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25% service
fee), 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. The 0.35% class A distribution and
service fee is currently not being imposed and will be paid by the fund
when the Trustees of the fund approve the fee.
10
<PAGE> 62
VI 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 by having your financial
adviser process your purchase. The minimum initial investment is $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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan).
If you exchange class A shares out of the 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.
11
<PAGE> 63
However, you will not pay this sales charge if:
- the shares of the fund were acquired by an exchange from any other MFS
fund;
- the shares exchanged from the fund were acquired by automatic
investment of dividends from any other MFS fund; or
- the shares being exchanged would have, at the time of purchase, been
eligible for purchase at net asset value had you invested directly.
Shares otherwise subject to a CDSC will not be charged a CDSC in an
exchange. However, when you redeem shares of the fund acquired through an
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.
Exchanges may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and policies are described
below under the captions "Right to Reject or Restrict Purchase and Exchange
Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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
12
<PAGE> 64
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS
13
<PAGE> 65
funds may consider trading done in multiple accounts under common ownership
or control.
REINSTATEMENT PRIVILEGE After you have redeemed class B or C shares, you
have a one-time right to reinvest the proceeds within 90 days of the
redemption at the current net asset value. 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.
Shareholders of the fund who have acquired class A shares of the fund by
exchange from any other MFS fund or by automatic investment of dividends
from other MFS funds and who have redeemed their class A shares have a
one-time right to reinvest the redemption proceeds in class A shares of any
of the MFS Funds (if shares of that fund are available for sale) at net
asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to this reinvestment privilege. If the class A shares
credited for any CDSC paid are then redeemed within twelve months of the
initial purchase, a CDSC will be imposed upon redemption.
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.
14
<PAGE> 66
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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
15
<PAGE> 67
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.
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.
FREE CHECKWRITING. You may redeem your class A or class C shares by writing
checks against your account. Checks must be for at least $500 and
investments made by check must have been in your account for at least 15
days before you can write checks against them. There is no charge for this
service. To authorize your account for checkwriting, contact MFSC (see back
cover for address and phone number).
Shares in your account equal in value to the amount of the check plus the
applicable CDSC (if any) and any income tax required to be withheld (if
any) are redeemed to cover the amount of the check. If your account value
is not great enough to cover these amounts, your check will be dishonored.
16
<PAGE> 68
VIII 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). The New York Stock Exchange is closed on most national
holidays and Good Friday. To determine net asset value, the fund values its
securities at amortized cost, or at fair value as determined by the adviser
under the direction of the Board of Trustees that oversees the fund if the
Trustees determine that amortized cost does not constitute fair value. 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 market 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 declare daily as dividends substantially all of its net
income (excluding any realized net capital gains) and to pay these
dividends to shareholders at least monthly. Because the net income of each
class of shares is declared as a dividend each day that the net income of
the class is determined, the net asset value per share of each class of
shares remains at $1.00 per share immediately after each such determination
and dividend declaration. Any increase in the value of your investment in
the fund, representing the reinvestment of dividend income, is reflected by
an increase in the number of shares of the fund in your account. Any
realized net capital gains are distributed at least annually.
17
<PAGE> 69
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your
particular tax adviser regarding the effect that an investment in the fund
may have on your particular tax situation.
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 distributions you receive from the fund, whether you take the
distributions in cash or reinvest them in additional shares. Distributions
designated as capital gain dividends are taxable as long-term capital
gains. Other distributions are generally taxable as ordinary income.
Distributions derived from interest on U.S. Government Securities (but not
distributions of gain from the sale of such securities) may be exempt from
state and local taxes. 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.
If you are neither a citizen nor a resident of the U.S., the fund will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends paid to any shareholder (including a
shareholder who is neither a citizen nor a resident of the U.S.) who does
not furnish to the fund certain information and certifications or who is
otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
18
<PAGE> 70
-- YEAR 2000 READINESS DISCLOSURE
The fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not properly process date-related information from and after
January 1, 2000. MFS recognizes the importance of the Year 2000 issue and,
to address Year 2000 compliance, created a separately funded Year 2000
Program Management Office in 1996 comprised of a specialized staff
reporting directly to MFS senior management. The Office, with the help of
external consultants, is responsible for overall coordination, strategy
formulation, communications and issue resolution with respect to Year 2000
issues. While MFS systems will be tested for Year 2000 readiness before the
turn of the century, there are significant systems interdependencies in the
domestic and foreign markets for securities, the business environments in
which companies held by the fund operate and in MFS' own business
environment. MFS has been working with the fund's other service providers
to identify and respond to potential problems with respect to Year 2000
readiness and to develop contingency plans. Year 2000 readiness is also one
of the factors considered by MFS in its ongoing assessment of companies in
which the fund invests. There can be no assurance, however, that these
steps will be sufficient to avoid any adverse impact on the fund.
-- 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.
19
<PAGE> 71
IX FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
fund's financial performance for the past five years. 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. The fund's Annual
Report is available upon request by contacting MFSC (see back cover for
address and telephone number). These financial statements are incorporated
by reference into the SAI. The fund's independent auditors are Deloitte &
Touche LLP.
20
<PAGE> 72
CLASS A SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data
(for a share outstanding
throughout
each period):
Net asset value -- beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Net investment income sec. $ 0.04 $ 0.05 $ 0.05 $ 0.04 $ 0.05
Less distributions declared to
shareholders from net
investment income (0.04) (0.05) (0.05) (0.04) (0.05)
------- ------- ------- ------- -------
Net asset value - end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Total return 4.33% 4.87% 4.64% 4.75% 4.91%
Ratios (to average net
assets)/Supplemental data sec.:
Expenses## 0.82% 0.82% 0.93% 0.84% 0.90%
Net investment income 4.22% 4.72% 4.54% 4.62% 4.94%
Net assets at end of period
(000 omitted) $98,719 $80,374 $45,007 $37,872 $10,852
sec. The investment adviser voluntarily waived a portion of its fee for the
periods indicated. If this fee had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.04 $ 0.05 $ 0.04 $ 0.04 $ 0.05
Ratios (to average net assets):
Expenses## 0.92% 0.92% 1.03% 0.94% 1.00%
Net investment income 4.12% 4.62% 4.44% 4.52% 4.84%
##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. For fiscal years ending after September 1,
1995, the fund's expenses are calculated without reduction for this expense
offset arrangement.
</TABLE>
21
<PAGE> 73
CLASS B SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data
(for a share outstanding
throughout each period):
Net asset value --
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Net investment income sec. $ 0.03 $ 0.04 $ 0.03 $ 0.04 $ 0.04
Less distributions declared
to shareholders from net
investment income (0.03) (0.04) (0.03) (0.04) (0.04)
-------- -------- -------- -------- --------
Net asset value -- end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Total return 3.29% 3.83% 3.58% 3.64% 3.81%
Ratios (to average net
assets)/Supplemental
data sec.:
Expenses## 1.82% 1.82% 1.95% 1.92% 1.93%
Net investment income 3.22% 3.78% 3.53% 3.58% 3.69%
Net assets at end of period
(000 omitted) $541,126 $438,577 $244,416 $251,192 $166,519
sec. The investment adviser voluntarily waived a portion of its fee for the
periods indicated. If this fee had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.03 $ 0.04 $ 0.03 $ 0.04 $ 0.04
Ratios (to average net
assets):
Expenses## 1.92% 1.92% 2.05% 2.02% 2.03%
Net investment income 3.12% 3.68% 3.43% 3.48% 3.59%
##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. For fiscal years ending after September 1, 1995, the
fund's expenses are calculated without reduction for this expense offset
arrangement.
</TABLE>
22
<PAGE> 74
CLASS C SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------
1999 1998 1997 1996*
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data
(for a share outstanding
throughout
each period):
Net asset value -- beginning of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------
Net investment income sec. $ 0.03 $ 0.04 $ 0.03 $ 0.01
Less distributions declared to
shareholders from net investment
income (0.03) (0.04) (0.03) (0.01)
-------- ------- ------- ------
Net asset value -- end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------
Total return 3.25% 3.76% 3.60% 3.67%+
Ratios (to average net
assets)/Supplemental data sec.:
Expenses## 1.82% 1.82% 1.95% 1.79%+
Net investment income 3.22% 3.80% 3.57% 3.60%+
Net assets at end of period (000
omitted) $105,559 $70,746 $16,373 $6,642
sec. The investment adviser voluntarily waived a portion of its fee for the
periods indicated. If this fee had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.03 $ 0.04 $ 0.03 $ 0.01
Ratios (to average net assets):
Expenses## 1.92% 1.92% 2.05% 1.89%+
Net investment income 3.12% 3.70% 3.47% 3.50%+
</TABLE>
* For the period from the inception of class C, April 1, 1996, through
August 31, 1996.
+ Annualized.
## 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's expenses are
calculated without reduction for this expense offset arrangement.
23
<PAGE> 75
APPENDIX A
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<CAPTION>
SYMBOLS X permitted -- not permitted
-----------------------------------------------------
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities --
Corporate Asset-Backed Securities X
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities X
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities X
Variable and Floating Rate
Obligations X
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds X
Equity Securities --
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts --
Dollar-Denominated Foreign Debt
Securities X
Emerging Markets --
Foreign Securities --
Forward Contracts --
Futures Contracts --
Indexed Securities/Structured Products --
Inverse Floating Rate Obligations --
</TABLE>
A-1
<PAGE> 76
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
................................................................................
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds --*
Closed-End Funds X
Lending of Portfolio Securities X
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions --*
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies --
Options on Futures Contracts --
Options on Securities --
Options on Stock Indices --
Reset Options --
"Yield Curve" Options --
Repurchase Agreements X
Restricted Securities X
Short Sales --*
Short Sales Against the Box --
Short Term Instruments X
Swaps and Related Derivative Instruments --
Temporary Borrowings X
Temporary Defensive Positions X
Warrants --
"When-issued" Securities --
</TABLE>
- ---------
* May only be changed with shareholder approval.
A-2
<PAGE> 77
MFS(R) CASH RESERVE 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.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI, dated January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
MCR-1 12/99 228M 01/201/301
<PAGE> 78
<TABLE>
<S> <C> <C>
[MFS 75 YEARS LOGO] STATEMENT OF ADDITIONAL [MFS CASH
INFORMATION RESERVE FUND
A SERIES OF MFS SERIES TRUST I LOGO]
500 BOYLSTON STREET, BOSTON, MA 02116 This SAI is divided into two Parts -- Part I and
(617) 954-5000 Part II. Part I contains information that is JANUARY 1, 2000
particular to the Fund, while Part II contains
This Statement of Additional Information, as information that generally applies to each of
amended or supplemented from time to time (the the funds in the MFS Family of Funds (the "MFS
"SAI"), sets forth information which may be of Funds"). Each Part of the SAI has a variety of
interest to investors but which is not appendices which can be found at the end of Part
necessarily included in the Fund's Prospectus I and Part II, respectively.
dated January 1, 2000. This SAI should be read THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED
in conjunction with the Prospectus. The Fund's FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY
financial statements are incorporated into this IF PRECEDED OR ACCOMPANIED BY A CURRENT
SAI by reference to the Fund's most recent PROSPECTUS.
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 of Part II
of this SAI for address and phone number).
</TABLE>
MCR-13 12/99 600
<PAGE> 79
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 2
VIII Tax Considerations.......................................... 3
IX Independent Auditors and Financial Statements............... 3
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 -- Description of Obligations Issued or
Guaranteed by U.S. Government Agencies, Authorities, or
Instrumentalities............................. H-1
Appendix I -- Description of Short-Term Investments other
than U.S. Government Obligations............................ I-1
</TABLE>
<PAGE> 80
I DEFINITIONS
"Fund"- MFS(R) Cash Reserve Fund, a series of the Trust. The Fund is the
successor to MFS Lifetime Money Market Fund, which was reorganized as a series
of the Trust on September 7, 1993.
"Trust" - MFS Series Trust I, a Massachusetts business trust, was organized in
1986. The Trust was known as "MFS Lifetime Managed Sectors Fund" prior to August
1, 1993 and as "Lifetime Managed Sectors Trust" prior to August 3, 1992.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated January 1, 2000, as amended or
supplemented from time to time.
II 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.
III 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.
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.
IV 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.
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 certain other MFS Funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS Funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the fund and the
Adviser).
V 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.
VI 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.
VII 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. A more detailed description of the obligations
issued by U.S. Government agencies, authorities, or instrumentalities appears in
Appendix H of Part I of this SAI. In addition, Appendix I of Part I of this SAI
contains a more detailed description of short-term investments other than U.S.
Government obligations.
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 A to the Prospectus, and are more fully described, together with
their associated risks, in Part II of this SAI.
The following percentage limitations apply to these investment techniques and
practices:
- - Up to 75% of net assets in each of the following groups: Finance companies;
banks; bank holding companies and utility companies.
Part I -- 1
<PAGE> 81
- - Up to 10% of net assets in bank obligations where the issuing bank has
capital, surplus and undivided profit less than or equal to $100 million.
- - Securities lending up to 30% of net assets.
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 the Fund or class, as applicable, or (ii) 67% or more of the
outstanding shares of the Trust or the Fund or class, as applicable, present at
a meeting at which holders of more than 50% of the outstanding shares of the
Trust or the Fund or class, as applicable, are represented in person or by
proxy). Except with respect to the Fund's policy on borrowing and investing in
illiquid securities, these investment restrictions and policies are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy. In the
event of a violation of nonfundamental investment policy (1), the Fund will
reduce the percentage of its assets invested in illiquid investments in due
course, taking into account the best interests of shareholders.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its total assets, and
then only as a temporary measure for extraordinary or emergency purposes, or
pledge, mortgage or hypothecate an amount of its assets (taken at market value)
in excess of 15% of its total assets, in each case taken at the lower of cost or
market value.
(2) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(3) Invest more than 25% of its total assets (taken at market value) in any
one industry; provided, however, that (a) there is no limitation in respect to
investments in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities and (b) the Fund may invest up to 75% of its
assets in all finance companies as a group, all bank and bank holding companies
as a group and all utility companies as a group when in the opinion of the
Adviser yield differentials and money market conditions suggest and when cash is
available for such investment and instruments are available for purchase which
fulfill the Fund's objective in terms of quality and marketability.
(4) Purchase or sell real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein and securities secured by real estate),
or mineral leases, commodities or commodity contracts in the ordinary course of
its business. The Fund reserves the freedom of action to hold and to sell real
estate or mineral leases, commodities or commodity contracts acquired as a
result of the ownership of securities.
(5) Make loans to other persons except by the purchase of obligations in which
the Fund is authorized to invest and by entering into repurchase agreements;
provided that the Fund may lend its portfolio securities representing not in
excess of 30% of its total assets (taken at market value). Not more than 10% of
the Fund's total assets (taken at market value) may be invested in repurchase
agreements maturing in more than seven days. The Fund may purchase all or a
portion of an issue of debt securities distributed privately to financial
institutions. For these purposes the purchase of short-term commercial paper or
a portion or all of an issue of debt securities which are part of an issue to
the public shall not be considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market value) to
be invested in the securities of such issuer, other than securities issued or
guaranteed by the United States, any state or political subdivision thereof, or
any political subdivision of any such state, or any agency or instrumentality of
the United States, any state or political subdivision thereof, or any political
subdivision of any such state.
(7) Purchase securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities) if such
purchase, at the time thereof, would cause the Fund to hold more than 10% of any
class of securities of such issuer. For this purpose all indebtedness of an
issuer maturing in less than one year shall be deemed a single class and all
preferred stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase or retain in its portfolio any securities issued by an issuer any
of whose officers, directors, trustees or security holders is an officer or
Trustee of the Trust, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by the Fund one
or more of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such persons
owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value.
(10) Purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of securities.
(11) Make short sales of securities.
(12) Purchase securities issued by any other registered investment company or
investment trust except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though
Part I -- 2
<PAGE> 82
not made in the open market, is part of a plan of merger or consolidation;
provided, however, that the Fund will not purchase such securities if such
purchase at the time thereof would cause more than 10% of its total assets
(taken at market value) to be invested in the securities of such issuers; and,
provided further, that the Fund will not purchase securities issued by an
open-end investment company.
(13) Write, purchase or sell any put or call option.
(14) Issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder.
In addition, the Fund has the following nonfundamental policy which may be
changed without shareholder approval. The Fund will not:
(1) Knowingly invest in securities which are subject to legal or contractual
restrictions on resale (other than repurchase agreements), unless the Board of
Trustees has determined that such securities are liquid based upon trading
markets for the specific security, if, as a result thereof, more than 10% of the
Fund's total assets (taken at market value) would be so invested.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for the two years ended August 31, 1999,
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 Deloitte
& Touche LLP, independent auditors, given upon their authority as experts in
accounting and auditing. A copy of the Annual Report accompanies this SAI.
Part I -- 3
<PAGE> 83
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 and President (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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director.
Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor.
Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer.
Address: 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: 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), Cambridge Nutraceuticals (professional nutritional products), Chief
Executive Officer.
Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director.
Address: 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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN*, Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.*, Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------------------------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS 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-1
<PAGE> 84
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 $1,250 per year
plus $225 per meeting and $225 per committee meeting attended, together with
such Trustee's out-of-pocket expenses. 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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT
BENEFIT TOTAL
TRUSTEE ACCRUED ESTIMATED TRUSTEE FEES
FEES AS PART OF CREDITED FROM FUND AND
FROM FUND YEARS OF FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,500 $1,370 10 $259,430
Marshall N. Cohan 3,725 2,087 14 143,259
Lawrence H. Cohn, M.D. 3,877 1,113 18 153,579
The Hon. Sir J. David Gibbons, KBE 3,500 1,825 13 130,059
Abby M. O'Neill 3,500 1,225 10 130,059
Walter E. Robb, III 4,102 2,193 15 171,154
Arnold D. Scott 0 0 0 0
Jeffrey L. Shames 0 0 0 0
J. Dale Sherratt 3,950 1,427 20 157,714
Ward Smith 3,725 1,613 13 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ended August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- ---------------------------------------------------
<S> <C> <C> <C> <C>
$3,150 $473 $ 788 $1,103 $1,575
3,422 513 856 1,198 1,711
3,695 554 924 1,293 1,847
3,967 595 992 1,389 1,984
4,240 636 1,060 1,484 2,120
4,512 677 1,128 1,579 2,256
</TABLE>
- -------------------------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-1
<PAGE> 85
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $2,558,323 $566,152 $74,673 $606,516 $0 $3,239,512
August 31, 1998 1,410,522 311,232 44,495 368,669 $0 1,823,686
August 31, 1997 1,235,927 273,794 23,063* 426,005 $0 1,684,995
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 86
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
August 31, 1999 N/A N/A N/A $6,975 $2,292,497 $172,689
August 31, 1998 N/A N/A N/A 0 968,864 50,683
August 31, 1997 N/A N/A N/A 49 1,111,045 24,444
</TABLE>
DISTRIBUTION PLAN PAYMENTS
................................................................................
During the fiscal year ended August 31, 1999, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
----------------------------------------------------------
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares N/A N/A N/A
Class B Shares $4,140,626 $3,143,734 $996,892
Class C Shares 740,309 991 739,318
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE> 87
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $0
August 31, 1998 0
August 31, 1997 0
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- --------------------------------------------------------------
<S> <C>
N/A
</TABLE>
Part I -- E-1
<PAGE> 88
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 30, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares.
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 1999, and are therefore presumed
to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
..........................................................................................
<S> <C> <C>
Prudential Securities Inc. (FBO) 5.31% of Class A shares
Worldwide Transaction LTD.
48 Par-La-Ville Rd
Suite 778
Hamilton
Bermuda
..........................................................................................
</TABLE>
Part I -- F-1
<PAGE> 89
PART I - APPENDIX G
PERFORMANCE INFORMATION
................................................................................
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
7 DAY CURRENT 7 DAY EFFECTIVE
ANNUALIZED ANNUALIZED
YIELD YIELD
--------------------------------
<S> <C> <C>
Class A Shares 4.51% 4.62%
Class B Shares 3.54% 3.60%
Class C Shares 3.57% 3.64%
</TABLE>
Part I -- G-1
<PAGE> 90
APPENDIX H
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS: are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities of
the U.S. Government are established under the authority of an act of Congress
and include, but are not limited to, the Tennessee Valley Authority, the Bank
for Cooperatives, the Farmers Home Administration, Federal Home Loan Banks,
Federal Intermediate Credit Banks and Federal Land Banks, as well as those
listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS: are bonds issued by
a cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration. These bonds are not guaranteed by the U.S.
Government.
MARITIME ADMINISTRATION BONDS: are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES: are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES: are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
a partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS: are bonds issued and guaranteed by
the Federal Home Loan Mortgage Corporation and are not guaranteed by the U.S.
Government.
FEDERAL HOME LOAN BANK BONDS: are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S. Government.
FINANCING CORPORATION BONDS AND NOTES: are bonds and notes issued and guaranteed
by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS: are bonds issued and guaranteed by
the Federal National Mortgage Association and are not guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES: are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES: are debentures backed by the
Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES: are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-through
certificates, are supported by the full faith and credit of the U.S. Government;
others, such as securities of FNMA, by the right of the issuer to borrow from
the U.S. Treasury; still others, such as bonds issued by SLMA, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government will provide financial support to instrumentalities sponsored by
the U.S. Government as it is not obligated by law, in certain instances, to do
so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the Fund
intends to invest, the Fund may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
Part I -- H-1
<PAGE> 91
APPENDIX I
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER
THAN U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in a
bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in order
to finance long-term credit needs.
A-1 AND P-1 SHORT-TERM RATINGS
Description of S&P and Moody's highest commercial paper ratings:
The rating "A-1" is the highest short-term rating assigned by S&P. The obligors
capacity to meet its financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
The rating P-1 is the highest short-term rating assigned by Moody's. Issuers
rated P-1 have a superior ability for repayment of senior short-term debt
obligations. P-1 repayment capacity will often be evidenced by many of the
following characteristics: (1) leading market positions in well established
industries; (2) high rates of return on funds employed; (3) conservative
capitalization structure with moderate reliance on debt and ample asset
protection; (4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and (5) well established access to a range of
financial markets and assured sources of alternate liquidity.
Part I -- I-1
<PAGE> 92
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE> 93
MFS(R) GLOBAL ASSET ALLOCATION(SM) FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
This supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2000. 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 "Description of Share Classes" below.
1. RISK RETURN SUMMARY
Performance Table. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's performance
over time. The table is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
1 YEAR LIFE*
------ -----
<S> <C> <C>
Class I shares 6.66% 11.95%
JP Morgan Non-Dollar Government Bond Index#+ 18.28% 9.28%
Lehman Brothers Aggregate Bond Index#++ 8.69% 8.76%
Morgan Stanley Capital International (MSCI) EAFE (Europe,
Australia, Far East) Index#+++ 20.33% 8.46%
Average global flexible portfolio## 10.14% 12.41%
S&P 500++++ 28.58% 27.71%
</TABLE>
- ------------------
# Source: Standard & Poor's Micropal, Inc.
## Source: Lipper Analytical Services, Inc.
* Fund performance figures are for the period from the commencement of the
fund's investment operations, July 22, 1994 through December 31, 1998.
Index and Average returns are from August 1, 1994.
+ The J.P. Morgan Non-Dollar Government Bond Index is a broad based,
unmanaged aggregate of actively traded government bonds issued from 12
countries (excluding the United States) with remaining maturities of at
least one year.
++ The Lehman Brothers Aggregate Bond Index is a broad based, unmanaged index
composed of all publicly issued obligations of the U.S. Treasury and
Government agencies, all corporate debt guaranteed by the U.S. Government,
all fixed-rate securities backed by mortgage pools of the Government
National Mortgage Association (GNMA), the Federal Home Loan Mortgage
Corporation (FHLMC), and the Federal National Mortgage Association (FNMA).
+++ The Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia,
Far East) Index is a broad based, unmanaged market-capitalization-weighted
total return index which measures the performance of 20 developed-county
global stock markets.
++++ The Standard & Poor's Composite Index (S&P 500) is a broad based, unmanaged
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on The New York Stock
Exchange, American Stock Exchange, and the over-the-counter market.
The fund commenced investment operations on July 22, 1994 with the offering of
class A, B and C shares, and subsequently offered class I shares on January 7,
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. This blended class I
share performance has been adjusted to take into account the fact that class I
shares have no initial sales charge (load). This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class I shares are lower than those of
class A shares, this blended class I share performance is lower than the
performance of class I shares would have been had class I shares been offered
for the entire period.
<PAGE> 94
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):
<TABLE>
<CAPTION>
<S> <C>
Management Fees................................... 0.60%
Distribution and Service (12b-1) Fees............. None
Other Expenses.................................... 0.34%
====
Total Annual Fund Operating Expenses(1)........... 0.94%
</TABLE>
- --------------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent, and may enter into other similar
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the fund's expenses). Had these fee reductions been
taken into account, "Total Annual Fund Operating Expenses" would have been
0.93% for class I.
3. EXAMPLE OF EXPENSES
The "Example of Expenses" table is intended to help you compare the cost of
investing in the fund with the cost of investing in other mutual funds.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and
you redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
The table is supplemented as follows:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class I shares $96 $300 $520 $1,155
</TABLE>
4. DESCRIPTION OF SHARE CLASSES
The "Description of Share Classes" 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; and
- 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.
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.
5. HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
<PAGE> 95
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.
6. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is intended to help you understand the
fund's financial performance. It is supplemented as follows:
Financial Statements - Class I shares
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
8/31/99 8/31/98 8/31/97*
---------- ---------- ------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.34 $ 18.74 $ 17.56
------- ------- --------
Income from investment operations# -
Net investment income $ 0.48 $ 0.57 $ 0.28
Net realized and unrealized gain(loss) on investments and
foreign currency transactions 1.50 (0.70) 1.16
------- ------- --------
Total from investment operations $ 1.98 $ (0.13) $ 1.44
------- ------- --------
Less distributions declared to shareholders -
From net investment income $ (0.75) $ (0.82) $ (0.26)
------- ------- --------
From net realized gain on investments and foreign
currency transactions (0.94) (1.45) --
------- ------- --------
Total distributions declared to shareholders $ (1.69) $ (2.27) $ (0.26)
Net asset value - end of period $ 16.63 $ 16.34 $ 18.74
------- ------- --------
Total return 12.73% (1.21)% 8.22%++
Ratios (to average net assets)Supplemental data:
Expenses## 0.94% 0.94% 0.97%+
Net investment income 2.84% 3.07% 3.43%+
Portfolio turnover 184% 127% 128%
Net assets at end of period (000 omitted) $ 45 $ 35 $ 34
</TABLE>
- ----------------------------------------
* For the period from the commencement of the Fund's offering of Class I
shares, January 7, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000.
<PAGE> 96
[MFS GLOBAL
ASSET
ALLOCATION
FUND LOGO]
JANUARY 1, 2000
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------
This Prospectus describes the MFS(R) Global Asset
Allocation(SM) Fund. The fund's investment objective is to
provide total return over the long-term through investments
in equity and fixed income securities, low volatility of
share price (i.e., net asset value per share) and reduced
risk (compared to an aggressive equity/fixed income fund).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 97
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary...................................... 1
II Expense Summary.......................................... 9
III Certain Investment Strategies and Risks.................. 10
IV Management of the Fund................................... 11
V Description of Share Classes............................. 12
VI How to Purchase, Exchange and Redeem Shares.............. 16
VII Investor Services and Programs........................... 20
VIII Other Information........................................ 22
IX Financial Highlights..................................... 24
Appendix A -- Investment Techniques and Practices........ A-1
</TABLE>
<PAGE> 98
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's investment objective is to provide total return over the
long-term through investments in equity and fixed income securities, low
volatility of share price (i.e., net asset value per share) and reduced
risk (compared to an aggressive equity/fixed income fund). The fund's
objective may be changed without shareholder approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund allocates its assets among some or all of the following five asset
classes of equity and fixed income securities:
- U.S. equity securities, which are common stocks and related securities,
such as preferred stock, convertible securities and depositary receipts
of U.S. issuers.
- Foreign equity securities, which are equity securities of foreign
issuers, including issuers located in emerging markets.
- U.S. investment grade fixed income securities, which are bonds or other
debt obligations of U.S. issuers. These bonds have been assigned higher
credit ratings by credit rating agencies or are unrated and considered by
the fund's investment adviser, Massachusetts Financial Services Company
(referred to as MFS or the adviser), to be comparable to higher rated
bonds. These securities may include:
- U.S. Government securities, which are bonds or other debt
obligations issued by, or whose principal and interest payments are
guaranteed or supported by, the U.S. Government or one of its
agencies or instrumentalities (including mortgage-backed
securities);
- Corporate bonds, which are bonds or other debt obligations issued
by corporations or similar entities; and
- Municipal bonds, which are bonds or other debt obligations of a
U.S. state or political subdivision, such as a county, city, town,
village or authority.
- U.S. high yield fixed income securities, which are bonds or other debt
obligations of U.S. issuers, including corporate bonds and municipal
bonds. These bonds are generally lower rated bonds, commonly known as
junk bonds, which are bonds assigned low credit ratings by credit rating
agencies or which are unrated and considered by MFS to be comparable to
lower rated bonds.
- Foreign fixed income securities, which are fixed income securities of
foreign issuers, including issuers located in emerging markets; these
securities may be investment grade or lower rated bonds.
The fund allocates its assets among these asset classes with a view towards
total return. The fund will vary the percentage of its assets invested in
any asset class in accordance with MFS' interpretation of the total return
outlook of various segments of the fixed income and equity markets, through
analysis of economic and market
1
<PAGE> 99
conditions, fiscal and monetary policy and underlying security values.
Under normal market conditions, at least 30% of the fund's total assets
will be invested in equity securities and the fund's assets will be
allocated among at least three of the asset classes above.
The fund is a non-diversified mutual fund. This means that the fund may
invest a relatively high percentage of its assets in a small number of
issuers.
EQUITY INVESTMENTS. While the fund may invest in all types of equity
securities, MFS generally seeks to purchase for the fund equity securities
of companies that 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; and
- A catalyst that may accelerate growth.
MFS uses a bottom-up, as opposed to a top-down, investment style in
managing the equity-oriented funds (such as the equity asset classes of the
fund) it advises. This means that securities are selected based upon
fundamental analysis of individual companies (such as an analysis of
earnings, cash flows, competitive position and management's abilities)
performed by the portfolio manager of the asset class and MFS' large group
of equity research analysts.
FIXED INCOME INVESTMENTS. Fixed income investments within the asset classes
are selected based upon fundamental analysis performed by the fund's
portfolio manager and MFS' large group of fixed income research analysts.
In assessing the credit quality of fixed income securities, MFS does not
rely solely on the credit ratings assigned by credit rating agencies, but
rather performs its own independent credit analysis.
FOREIGN INVESTMENTS. The fund's investments in foreign securities may
include equity and fixed income securities of foreign companies, fixed
income securities issued by foreign governments and Brady Bonds. Although
the percentage of the fund's assets invested in foreign securities may
vary, the fund will generally invest in at least three different countries,
one of which may be the United States. The fund may have exposure to
foreign currencies through its investment in foreign securities, its direct
holdings of foreign currencies and through its use of foreign currency
exchange contracts for the purchase or sale of a fixed quantity of a
foreign currency at a future date.
A company's principal activities are determined to be located in a
particular country if the company (a) is organized under the laws of, and
maintains a principal office in a country, (b) has its principal securities
trading market in a country, (c) derives 50% of its total revenues from
goods or services performed in the country, or (d) has 50% or more of its
assets in the country.
2
<PAGE> 100
OTHER CONSIDERATIONS. The fund may invest in derivative securities.
Derivatives are financial instruments whose value may be based on other
securities, currencies, interest rates, or indices. Derivatives include:
- Futures and forward contracts;
- Options on futures contracts, foreign currencies, securities and
securities indices;
- Structured notes and indexed securities; and
- Swaps, caps, collars and floors.
The fund has engaged and may engage in active and frequent trading to
achieve its principal investment strategies.
-- PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
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:
- Allocation Risk: The fund will allocate its investments among the fixed
income and equity security asset classes described above based upon
judgments made by MFS. The fund could miss attractive investment
opportunities by underweighting asset classes where there are significant
returns, or could lose value by overweighting asset classes where there
are significant declines.
- Market Risk: The value of the securities in which the fund invests may
decline due to changing economic, political or market conditions or
disappointing earnings results.
- Company Risk: Prices of securities react to the economic condition of
the company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
- Interest Rate Risk: When interest rates rise, the prices of fixed income
securities in the fund's portfolio will generally fall. Conversely, when
interest rates fall, the prices of fixed income securities in the fund's
portfolio will generally rise.
- Maturity Risk: Interest rate risk will generally affect the price of a
fixed income security more if the security has a longer maturity. Fixed
income securities with longer maturities will therefore be more volatile
than other fixed income securities with shorter maturities because
changes in interest rates are increasingly difficult to predict over
longer periods of time. Conversely, fixed income securities with shorter
maturities will be less volatile but generally provide lower returns than
fixed income securities with longer maturities. The average maturity of
the fund's fixed income investments will affect the volatility of the
fund's share price.
3
<PAGE> 101
- Credit Risk: Credit risk is the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due. Rating
agencies assign credit ratings to certain fixed income securities to
indicate their credit risk. The price of a fixed income security will
generally fall if the issuer defaults on its obligation to pay principal
or interest, the rating agencies downgrade the issuer's credit rating or
other news affects the market's perception of the issuer's credit risk.
- Non-Diversified Status Risk: Because the fund may invest its assets in a
small number of issuers, the fund is more susceptible to any single
economic, political or regulatory event affecting those issuers than is a
diversified fund.
- Lower Rated Bonds Risk:
- Higher Credit Risk: Junk bonds are subject to a substantially
higher degree of credit risk than investment grade bonds. During
recessions, a high percentage of issuers of junk bonds may default
on payments of principal and interest. The price of a junk bond may
therefore fluctuate drastically due to bad news about the issuer or
the economy in general.
- Higher Liquidity Risk: During recessions and periods of broad
market declines, junk bonds could become less liquid, meaning that
they will be harder to value or sell at a fair price.
- 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, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. 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. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in the fund's foreign currency
holdings.
4
<PAGE> 102
- Emerging Markets Risk: 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 market 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.
- Geographic Concentration Risk: The fund may invest a substantial amount
of its assets in issuers located in a single country or a limited number
of countries. If the fund concentrates its investments in this manner, it
assumes the risk that economic, political and social conditions in those
countries will have a significant impact on its investment performance.
The fund's investment performance may also be more volatile if it
concentrates its investments in certain countries, especially emerging
market countries.
- Active or Frequent Trading Risk: The fund has engaged and 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 as compared to a fund with less
active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could detract
from the fund's performance.
- Over-the-Counter Risk: Equity and fixed income securities purchased by
the fund may be traded in the over-the-counter (OTC) market rather than
on an organized exchange. Many OTC securities trade less frequently and
in smaller volume than exchange traded securities. OTC investments are
therefore subject to liquidity risk, meaning the securities are harder to
value or sell at a fair price. Companies that issue OTC securities may
have limited product lines, markets or financial resources compared to
companies that issue exchange traded securities. The value of OTC
securities may be more volatile than exchange traded securities. These
factors could have a negative impact on the value of an OTC security and
therefore on the fund's performance.
- Derivatives Risk:
- Hedging Risk: When a derivative is used as a hedge against an
opposite position that the fund also holds or against portfolio
exposure, any loss generated by the derivative should be
substantially offset by gains on the hedged investment or portfolio
exposure, and vice versa. While hedging can reduce or eliminate
losses, it can also reduce or eliminate gains and could result in
losses.
- Correlation Risk: When the fund uses derivatives to hedge, it
takes the risk that changes in the value of the derivative will not
match those of the
5
<PAGE> 103
asset being hedged. Incomplete correlation or lack of correlation
can result in unanticipated losses on the derivative as well as the
position being hedged.
- Investment Risk: When the fund uses derivatives as an investment
vehicle to gain market exposure, rather than for hedging purposes,
any loss on the derivative investment will not be offset by gains
on another hedged investment. The fund is therefore directly
exposed to the risks of that derivative. Gains or losses from
derivative investments may be substantially greater than the
derivative's original cost.
- Availability Risk: Derivatives may not be available to the fund
upon acceptable terms. As a result, the fund may be unable to use
derivatives for hedging or other purposes.
- Credit Risk: When the fund uses derivatives, it is subject to the
risk that the other party to the agreement will not be able to
perform.
- Liquidity Risk: The fund may not be able to sell derivatives that
are in a loss position.
- 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.
-- 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 changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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.
6
<PAGE> 104
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
B shares. The chart and related notes do not take into account any sales
charges (loads) 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 B returns shown in the bar
chart, depending upon the expenses of those classes.
[Performance Graph]
<TABLE>
<CAPTION>
CLASS B SHARES
--------------
<S> <C>
1995 20.62%
1996 14.48%
1997 9.66%
1998 5.63%
</TABLE>
The total return for the nine-month period ended September 30, 1999 was
2.11%. During the period shown in the bar chart, the highest quarterly
return was 10.14% (for the calendar quarter ended March 31, 1998) and the
lowest quarterly return was (11.54)% (for the calendar quarter ended
September 30, 1998).
7
<PAGE> 105
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compare to a broad measure of market performance and various other
market indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year Life#
<S> <C> <C>
Class A shares 1.17% 10.52%
Class B shares 1.77% 10.72%
Class C shares 4.65% 11.07%
JP Morgan Non-Dollar Government Bond Index+* 18.28% 9.28%
Lehman Brothers Aggregate Bond Index+** 8.69% 8.76%
Morgan Stanley Capital International (MSCI)
EAFE (Europe, Australia, Far East) Index+*** 20.33% 8.46%
Average global flexible portfolio++ 10.14% 12.41%
S&P 500 Composite Index+**** 28.58% 27.71%
</TABLE>
- ---------------
+ Source: Standard & Poor's Micropal, Inc.
++ Source: Lipper Analytical Services, Inc.
# Fund performance figures are for the period from the commencement of
the fund's investment operations on July 22, 1994. Index and Lipper
average returns are from August 1, 1994.
* The J.P. Morgan Non-dollar Government Bond Index is a broad based,
unmanaged aggregate of actively traded government bonds issued from 12
countries (excluding the United States) with remaining maturities of at
least one year.
** The Lehman Brothers Aggregate Bond Index is a broad based, unmanaged
index and is composed of all publicly issued obligations of the U.S.
Treasury and Government agencies, all corporate debt guaranteed by the
U.S. Government, all fixed-rate nonconvertible investment-grade
domestic corporate debt, and all fixed-rate securities backed by
mortgage pools of the Government National Mortgage Association (GNMA),
the Federal Home Loan Mortgage Corporation (FHLMC), and the Federal
National Mortgage Association (FNMA).
*** The Morgan Stanley Capital International (MSCI) EAFE (Europe,
Australia, Far East) Index is a broad-based, unmanaged
market-capitalization-weighted total return index which measures the
performance of 20 developed-country global stock markets.
**** The Standard & Poor's 500 Composite Index (S&P 500) is a broad based,
unmanaged but commonly used measure of common stock total return
performance. It is composed of 500 widely held common stocks listed on
the New York Stock Exchange, American Stock Exchange and the over the
counter market.
The fund commenced investment operations on July 22, 1994 with the offering
of class A, B and C Shares.
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge. Class B share 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 share
performance takes into account the deduction of the 1% CDSC.
8
<PAGE> 106
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering
price)(1)........................ 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds, whichever is
less)............................ See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
...........................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees.................. 0.60% 0.60% 0.60%
Distribution and Service (12b-1)
Fees(2).......................... 0.50% 1.00% 1.00%
Other Expenses................... 0.34% 0.34% 0.34%
Total Annual Fund Operating ------ ------ ------
Expenses(3)...................... 1.44% 1.94% 1.94%
</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, and may enter into other
such agreements and directed brokerage arrangements (which would also
have the effect of reducing the fund's expenses). Any such fee
reductions are not reflected in the table. Had these fee reductions
been taken into account, "Total Annual Fund Operating Expenses" would
have been 1.43% for class A, 1.93% for class B and 1.93% for class C.
9
<PAGE> 107
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $615 $909 $1,225 $2,117
Class B shares(1)
Assuming redemption at end of
period 597 909 1,247 2,135
Assuming no redemption 197 609 1,047 2,135
Class C shares
Assuming redemption at end of
period 297 609 1,047 2,264
Assuming no redemption 197 609 1,047 2,264
</TABLE>
--------------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A expenses.
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
In addition, 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's defensive
investment position may not be effective in protecting its value.
10
<PAGE> 108
IV 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 $122.76 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of
assets in equity securities, approximately $21.2 billion of assets in fixed
income funds and fixed income portfolios and approximately $8.9 billion of
assets in foreign securities. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the fund paid MFS an annual management fee, computed and
paid monthly, in an amount equal to 0.60% of the average daily net assets
of the fund for the fund's fiscal year ended August 31, 1999.
-- PORTFOLIO MANAGER
Joseph C. Flaherty, Jr., a Vice President of the adviser, determines the
allocation of assets among the following five asset classes: (i) U.S.
equity securities; (ii) foreign equity securities; (iii) U.S. investment
grade fixed income securities; (iv) U.S. high yield fixed income
securities; and (v) foreign fixed income securities. Mr. Flaherty has been
employed as a portfolio manager by the adviser since 1993. A team of
portfolio managers selects specific portfolio securities within each of
these asset classes.
-- 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.
-- 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.
11
<PAGE> 109
V DESCRIPTION OF SHARE CLASSES
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 purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), 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 0.50% 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>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
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.
12
<PAGE> 110
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.
In addition, 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:
- 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 (referred to as 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;
- 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; and
- the plan has not redeemed its class B shares in the MFS funds in
order to purchase class A shares under this category.
- 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
13
<PAGE> 111
- 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.
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
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.
14
<PAGE> 112
-- 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
appreciation or 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, which means that the CDSC will be applied
against the lesser of your direct investment or the total cost of your
shares. The applicability of a CDSC will not be affected by exchanges or
transfers of registration, except as described in the SAI.
-- 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 0.50% for class
A shares (0.25% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25% service
fee), 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.
15
<PAGE> 113
VI 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 by having your financial
adviser process your purchase. The minimum initial investment is $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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC 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
16
<PAGE> 114
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 may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and policies are described
below under the captions "Right to Reject or Restrict Purchase and Exchange
Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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.
17
<PAGE> 115
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS funds may
consider trading done in multiple accounts under common ownership or
control.
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.
18
<PAGE> 116
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.
19
<PAGE> 117
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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
20
<PAGE> 118
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 $100,000 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.
21
<PAGE> 119
VIII OTHER INFORMATION GRAPHIC
-- 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). The New York Stock Exchange is closed for business on most
national holidays and Good Friday. 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 (excluding any
realized net capital gains) to shareholders as dividends at least
quarterly. Any realized net capital gains are distributed at least
annually.
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on
your particular tax situation.
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.
22
<PAGE> 120
You will normally have to pay federal income taxes, and any state or local
taxes, on the distributions you receive from the fund, whether you take the
distributions in cash or reinvest them in additional shares. Distributions
designated as capital gain dividends are taxable as long-term capital
gains. Other distributions are generally taxable as ordinary income.
Distributions derived from interest on U.S. Government Securities (but not
distributions of gain from the sale of such securities) may be exempt from
state and local taxes. 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.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if 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 will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to the fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding. Prospective investors should read the fund's
Account Application for additional information regarding backup withholding
of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
-- YEAR 2000 READINESS DISCLOSURE
The fund could be adversely affected if the computer systems used by MFS,
the fund's other service providers or the companies in which the fund
invests do not
23
<PAGE> 121
properly process date-related information from and after January 1, 2000.
MFS recognizes the importance of the Year 2000 issue and, to address Year
2000 compliance, created a separately funded Year 2000 Program Management
Office in 1996 comprised of a specialized staff reporting directly to MFS
senior management. The Office, with the help of external consultants, is
responsible for overall coordination, strategy formulation, communications
and issue resolution with respect to Year 2000 issues. While MFS systems
will be tested for Year 2000 readiness before the turn of the century,
there are significant systems interdependencies in the domestic and foreign
markets for securities, the business environments in which companies held
by the fund operate and in MFS' own business environment. MFS has been
working with the fund's other service providers to identify and respond to
potential problems with respect to Year 2000 readiness and to develop
contingency plans. Year 2000 readiness is also one of the factors
considered by MFS in its ongoing assessment of companies in which the fund
invests. There can be no assurance, however, that these steps will be
sufficient to avoid any adverse impact on the fund.
-- 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.
IX FINANCIAL HIGHLIGHTS GRAPHIC
The financial highlights table is intended to help you understand the
fund's financial performance for the past five years. 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. The fund's Annual
Report is available upon request by contacting MFSC (see back cover for
address and telephone number). These financial statements are incorporated
by reference into the SAI. The fund's independent auditors are Ernst &
Young LLP.
24
<PAGE> 122
CLASS A SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data
(for a share outstanding
throughout each period):
Net asset value -- beginning
of period $ 16.36 $ 18.75 $ 17.68 $ 16.63 $ 15.33
------- ------- -------- ------- -------
Income from investment
operations# --
Net investment incomesec. $ 0.40 $ 0.47 $ 0.46 $ 0.43 $ 0.55
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions 1.51 (0.69) 2.19 1.85 1.17
------- ------- -------- ------- -------
Total from investment
operations $ 1.91 $ (0.22) $ 2.65 $ 2.28 $ 1.72
------- ------- -------- ------- -------
Less distributions declared to
shareholders --
From net investment income $ (0.66) $ (0.72) $ (0.40) $ (0.49) $ (0.37)
From net realized gain on
investments and foreign
currency transactions (0.94) (1.45) (1.18) (0.74) (0.05)
------- ------- -------- ------- -------
Total distributions declared
to shareholders $ (1.60) $ (2.17) $ (1.58) $ (1.23) $ (0.42)
------- ------- -------- ------- -------
Net asset value -- end of
period $ 16.67 $ 16.36 $ 18.75 $ 17.68 $ 16.63
======= ======= ======== ======= =======
Total return++ 12.29% (1.72)% 15.67% 14.23% 11.48%
Ratios (to average net assets)/
Supplemental datasec.:
Expenses## 1.44% 1.44% 1.43% 1.48% 1.47%
Net investment income 2.38% 2.57% 2.51% 2.45% 3.49%
Portfolio turnover 184% 127% 128% 202% 118%
Net assets at end of period
(000 omitted) $79,908 $97,007 $111,959 $86,457 $58,663
</TABLE>
--------------
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the fund's expenses
are calculated without reduction for fees paid indirectly.
++ Total returns for class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
sec. The investment adviser and/or the distributor voluntarily waived a
portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If the fee had
been incurred by the fund, the net investment income per share and
the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income -- -- $ 0.45 $ 0.42 $ 0.52
Ratios (to average net assets)
Expenses## -- -- 1.46% 1.53% 1.67%
Net investment income -- -- 2.48% 2.40% 3.29%
</TABLE>
25
<PAGE> 123
CLASS B SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data
(for a share outstanding
throughout
each period):
Net asset
value -- beginning of
period $ 16.31 $ 18.70 $ 17.63 $ 16.58 $ 15.31
-------- -------- -------- -------- -------
Income from investment
operations# --
Net investment income $ 0.32 $ 0.38 $ 0.36 $ 0.32 $ 0.43
Net realized and
unrealized gain (loss) on
investments and foreign
currency transactions 1.48 (0.69) 2.19 1.85 1.17
-------- -------- -------- -------- -------
Total from investment
operations $ 1.80 $ (0.31) $ 2.55 $ 2.17 $ 1.60
-------- -------- -------- -------- -------
Less distributions
declared to shareholders--
From net investment income $ (0.57) $ (0.63) $ (0.30) $ (0.38) $ (0.28)
In excess of net
investment income -- -- -- (0.74) (0.05)
From net realized gain on
investments and foreign
currency transactions (0.94) (1.45) (1.18) -- --
-------- -------- -------- -------- -------
Total distributions
declared to shareholders $ (1.51) $ (2.08) $ (1.48) $ (1.12) $ (0.33)
-------- -------- -------- -------- -------
Net asset value -- end of
period $ 16.60 $ 16.31 $ 18.70 $ 17.63 $ 16.58
======== ======== ======== ======== =======
Total return 11.67% (2.23)% 15.01% 13.58% 10.65%
Ratios (to average net
assets)/ Supplemental data:
Expenses## 1.94% 1.94% 1.98% 2.10% 2.24%
Net investment income 1.91% 2.06% 1.96% 1.83% 2.75%
Portfolio turnover 184% 127% 128% 202% 118%
Net assets at end of period
(000 omitted) $121,009 $147,882 $166,865 $124,399 $83,601
</TABLE>
--------------
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the fund's expenses
are calculated without reduction for fees paid indirectly.
26
<PAGE> 124
CLASS C SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning
of period $ 16.29 $ 18.67 $ 17.62 $ 16.58 $ 15.31
------- ------- ------- ------- -------
Income from investment
operations# --
Net investment income $ 0.32 $ 0.38 $ 0.36 $ 0.33 $ 0.46
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions 1.49 (0.70) 2.18 1.85 1.16
------- ------- ------- ------- -------
Total from investment
operations $ 1.81 $ (0.32) $ 2.54 $ 2.18 $ 1.62
------- ------- ------- ------- -------
Less distributions declared to
shareholders --
From net investment income $ (0.57) $ (0.61) $ (0.31) $ (0.40) $ (0.30)
From net realized gain on
investments and foreign
currency transactions (0.94) (1.45) (1.18) (0.74) (0.05)
------- ------- ------- ------- -------
Total distributions declared
to shareholders $ (1.51) $ (2.06) $ (1.49) $ (1.14) $ (0.35)
------- ------- ------- ------- -------
Net asset value -- end of
period $ 16.59 $ 16.29 $ 18.67 $ 17.62 $ 16.58
======= ======= ======= ======= =======
Total return 11.65% (2.21)% 15.06% 13.62% 10.72%
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.94% 1.94% 1.96% 2.03% 2.18%
Net investment income 1.93% 2.06% 2.00% 1.89% 2.91%
Portfolio turnover 184% 127% 128% 202% 118%
Net assets at end of period
(000 omitted) $24,438 $37,248 $58,074 $33,283 $19,325
</TABLE>
--------------
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
27
<PAGE> 125
[Appendix A Graphic]
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<S> <C> <C>
SYMBOLS X permitted -- not permitted
-------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities X
Corporate Asset-Backed Securities X
Mortgage Pass-Through Securities X
Stripped Mortgage-Backed Securities X
Corporate Securities X
Loans and Other Direct Indebtedness X
Lower Rated Bonds X
Municipal Bonds X
Speculative Bonds X
U.S. Government Securities X
Variable and Floating Rate
Obligations X
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds X
Equity Securities X
Foreign Securities Exposure
Brady Bonds X
Depositary Receipts X
Dollar-Denominated Foreign Debt
Securities X
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities X
Inverse Floating Rate Obligations X
</TABLE>
A-1
<PAGE> 126
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
................................................................................
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds X
Closed-End Funds X
Lending of Portfolio Securities X
Leveraging Transactions
Bank Borrowings --*
Mortgage "Dollar-Roll" Transactions X**
Reverse Repurchase Agreements --*
Options
Options on Foreign Currencies X
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options X
"Yield Curve" Options X
Repurchase Agreements X
Restricted Securities X
Short Sales --
Short Sales Against the Box --
Short Term Instruments X
Swaps and Related Derivative Instruments X
Temporary Borrowings X
Temporary Defensive Positions X
Warrants X
"When-issued" Securities X
</TABLE>
-----------
* May only be changed with shareholder approval.
** The fund may enter into "covered" mortgage dollar-roll transactions,
meaning that the fund segregates liquid securities equal in value to the
securities it will repurchase and does not use these transactions as a
form of leverage.
A-2
<PAGE> 127
MFS(R) GLOBAL ASSET ALLOCATION(SM) 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 January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
MWA-1 12/99 166M 88/288/388/888
<PAGE> 128
<TABLE>
<S> <C> <C>
[MFS 75 YEARS LOGO] STATEMENT OF ADDITIONAL [MFS GLOBAL
INFORMATION ASSET ALLOCATION
A SERIES OF MFS SERIES TRUST I FUND LOGO]
500 BOYLSTON STREET, BOSTON, MA 02116 JANUARY 1, 2000
(617) 954-5000
This Statement of Additional Information, as This SAI is divided into two Parts -- Part I and
amended or supplemented from time to time (the Part II. Part I contains information that is
"SAI"), sets forth information which may be of particular to the Fund, while Part II contains
interest to investors but which is not information that generally applies to each of
necessarily included in the Fund's Prospectus the funds in the MFS Family of Funds (the "MFS
dated January 1, 2000. This SAI should be read Funds"). Each Part of the SAI has a variety of
in conjunction with the Prospectus. The Fund's appendices which can be found at the end of Part
financial statements are incorporated into this I and Part II, respectively.
SAI by reference to the Fund's most recent
Annual Report to shareholders. A copy of the THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED
Annual Report accompanies this SAI. You may FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY
obtain a copy of the Fund's Prospectus and IF PRECEDED OR ACCOMPANIED BY A CURRENT
Annual Report without charge by contacting MFS PROSPECTUS.
Service Center, Inc. (see back cover of Part II
of this SAI for address and phone number).
</TABLE>
MWA-13 12/99 600
<PAGE> 129
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 1
VIII Tax Considerations.......................................... 2
IX Independent Auditors and Financial Statements............... 2
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
</TABLE>
<PAGE> 130
I DEFINITIONS
"Fund" - MFS Global Asset Allocation Fund, is a series of the Trust. The Fund
was known as MFS World Asset Allocation Fund prior to August 24, 1998.
"Trust" - MFS Series Trust I, a Massachusetts business trust, was organized in
1986. The Trust was known as "MFS Lifetime Managed Sectors Fund" prior to June
3, 1993 and Lifetime Managed Sectors Trust prior to August 3, 1992.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated January 1, 2000, as amended or
supplemented from time to time.
II MANAGEMENT OF THE FUND
THE FUND
The Fund is a non-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.
III 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.
IV 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.
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 certain other MFS funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the fund and the
Adviser).
V 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.
VI 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.
VII 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 A to the Prospectus, and are more fully
described, together with their associated risks, in Part II of this SAI.
The following percentage limitations apply to these investment techniques and
practices:
- - Lower Rated Bonds may not exceed 70% of the Fund's net assets.
- - Lending of Portfolio Securities may not exceed 30% of the net assets.
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 the Fund or class, as applicable, or (ii) 67% or more of
Part I -- 1
<PAGE> 131
the outstanding shares of the Trust or the Fund or class, as applicable, present
at a meeting at which holders of more than 50% of the outstanding shares of the
Trust or the Fund or class, as applicable, are represented in person or by
proxy). Except with respect to the Fund's policy on borrowing and investing in
illiquid securities, these investment restrictions and policies are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy. In the
event of a violation of nonfundamental investment policy (1), the Fund will
reduce the percentage of its assets invested in illiquid investments in due
course, taking into account the best interests of shareholders.
The Fund may not:
(1) Borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed, and then only as a temporary measure for extraordinary or
emergency purposes.
(2) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
in selling a portfolio security.
(3) Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding currencies, any type
of option, any type of futures contract, and Forward Contracts) in the
ordinary course of its business. The Fund reserves the freedom of action
to hold and to sell real estate, mineral leases, commodities or commodity
contracts (including currencies, any type of option, any type of futures
contract, and Forward Contracts) acquired as a result of the ownership of
securities.
(4) Issue any senior securities except as permitted by the 1940 Act. (For
purposes of this restriction, collateral arrangements with respect to any
type of option, any type of swap agreement, Forward Contracts and any type
of futures contract and collateral arrangements with respect in initial
and variation margin are not deemed to be the issuance of a senior
security).
(5) Make loans to other persons. For these purposes the purchase of short-term
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, and the investment of the
Fund's assets in repurchase agreements shall not be considered the making
of a loan.
(6) Purchase any securities of an issuer of a particular industry, if as a
result 25% or more of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry
(except for obligations issued or guaranteed by the U.S. Government or its
agencies, authorities or instrumentalities and repurchase agreements
collateralized by such obligations).
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) Invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended, or, in the
case of unlisted securities, where no market exists) if more than 15% of
the Fund's net assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will be
deemed to be illiquid for purposes of this limitation. Securities that are
not registered under the 1933 Act and sold in reliance on Rule 144A
thereunder, but are determined to be liquid by the Trust's Board of
Trustees (or its delegee), will not be subject to this 15% limitation.
(2) Pledge, mortgage or hypothecate in excess of 33 1/3% of its gross assets.
For purposes of this restriction, collateral arrangements with respect to
any type of option, any type of futures contracts, any type of swap
agreement, Forward Contracts and payments of initial and variation margin
in connection therewith, are not considered a pledge of assets.
(3) Purchase securities while borrowings pursuant to fundamental investment
restriction 1 exceed 5% of a Fund's total assets; however, the Fund may
complete the purchase of securities already contracted for.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for the two years ended August 31, 1999,
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 -- 2
<PAGE> 132
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 and President (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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director.
Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor.
Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer.
Address: 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: Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director.
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);
Cambridge Nutraceuticals (professional nutritional products), Chief Executive
Officer.
Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to June, 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director.
Address: Hunting Valley, Ohio
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President.
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President.
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996).
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (until September 1994).
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary.
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel.
- ----------------------------
*"Interested persons" (as defined in the Investment Company Act of 1940 (the
"1940 Act") of the Adviser, whose address is 500 Boylston Street, Boston,
Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. 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-1
<PAGE> 133
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 $1,250 per year
plus $225 per meeting and $225 per committee meeting attended, together with
such Trustee's out-of-pocket expenses. 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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT TOTAL
TRUSTEE BENEFIT ESTIMATED TRUSTEE FEES
FEES ACCRUED CREDITED FROM FUND AND
FROM AS PART OF YEARS OF FUND
TRUSTEE FUND(1) FUND EXPENSE(1) SERVICE(2) COMPLEX(3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,500 $ 856 7 $259,430
Marshall N. Cohan 3,725 1,044 7 143,259
Lawrence H. Cohn, M.D. 3,777 924 17 153,579
The Hon. Sir J. David Gibbons, KBE 3,500 912 7 130,059
Abby M. O'Neill 3,500 875 8 130,059
Walter E. Robb, III 4,002 1,093 7 171,154
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 3,950 1,188 19 157,714
Ward Smith 3,725 1,150 11 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ended August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- -------------------------------------------------
<S> <C> <C> <C> <C>
$3,150 $473 $ 788 $1,103 $1,575
3,400 510 850 1,190 1,700
3,651 548 913 1,278 1,825
3,901 585 975 1,365 1,951
4,152 623 1,038 1,453 2,076
4,402 660 1,101 1,541 2,201
</TABLE>
- -------------------------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-1
<PAGE> 134
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $1,585,954 N/A $32,981 $284,460 N/A $1,903,395
August 31, 1998 2,008,668 N/A 47,410 396,341 N/A 2,452,419
August 31, 1997 1,842,326 N/A 25,004* 448,935 N/A 2,316,265
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 135
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $143,497 $19,024 $124,473 $1,443 $372,484 $ 8,015
August 31, 1998 316,978 55,821 261,157 802 272,987 12,392
August 31, 1997 585,549 96,516 489,033 2,458 219,072 13,120
</TABLE>
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>
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
<S> <C>
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, 1999, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
----------------------------------------------------------
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $ 467,697 $ 31,066 $436,631
Class B Shares 1,382,904 1,068,327 314,577
Class C Shares 324,545 30,697 293,848
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE> 136
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $686,213
August 31, 1998 730,974
August 31, 1997 779,486
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- --------------------------------------------------------------
<S> <C>
General Electric Company $988,350
Morgan Stanley Dean Witter $300,344
</TABLE>
Part I -- E-1
<PAGE> 137
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 30, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares.
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 September 30, 1999, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
..........................................................................................
<S> <C> <C>
MLPF&S for the sole benefit of its customers 8.77% of Class B Shares
Attn: Fund Administration 97EG2
4800 Deer Lake Drive, 3rd FL
Jacksonville, FL 32246-6484
..........................................................................................
MLPF&S for the sole benefit of its customers 20.93% of Class C Shares
Attn: Fund Administration 97EG3
4800 Deer Lake Drive, 3rd FL
Jacksonville, FL 32246-6484
..........................................................................................
TRS MFS DEF Contribution Plan 99.77% of Class I Shares
c/o Mark Leary
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
</TABLE>
Part I -- F-1
<PAGE> 138
PART I - APPENDIX G
PERFORMANCE INFORMATION
................................................................................
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
---------------------- (INCLUDING (WITHOUT ANY DISTRIBUTION
1 YEAR 5 YEARS LIFE* WAIVERS) WAIVERS) RATE+
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (4.75%) 6.96% 9.14% 9.40% 1.22% 1.22% 5.12%
Class A Shares, at net asset value 12.29% 10.20% 10.44% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) 7.67% 9.27% 9.64% N/A N/A N/A
Class B Shares, at net asset value 11.67% 9.55% 9.78% 0.78% 0.78% 4.60%
Class C Shares, with CDSC (1% for
first year) 10.65% 9.59% 9.81% N/A N/A N/A
Class C Shares, at net asset value 11.65% 9.59% 9.81% 0.78% 0.78% 4.56%
Class I Shares, at net asset value 12.73% 10.47% 10.70% 1.78% 1.78% 5.70%
</TABLE>
- -------------------------------
* From commencement of the Fund's investment operations on July 22, 1994.
+ Annualized, based upon the last distribution.
The Fund commenced investment operations on July 22, 1994 with the offering of
class A, B and C shares and subsequently offered class I shares on January 7,
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. This blended class I
share performance has been adjusted to take into account the fact that class I
shares have no initial sales charge (load). This blended performance has not
been adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class I shares are lower than those of
class A shares, this blended class I share performance is lower than the
performance of class I shares would have been had class I shares been offered
for the entire period.
Part I -- G-1
<PAGE> 139
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE> 140
MFS(R) CORE GROWTH FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2000. 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 "Description of Share
Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's performance
over time. The table is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFS CORE GROWTH FUND 1 YEAR LIFE*
------ -----
<S> <C> <C>
Class I shares 37.03% 38.32%
Standard & Poor's 500 Composite Index#+ 28.58% 28.23%
Average growth fund++ 23.42% 22.24%
</TABLE>
- ----------------------------
* Fund performance figures are for the period from the commencement of the
Fund's investment operations on January 2, 1996, through December 31, 1998.
Index and Lipper average returns are from January 1, 1996.
# The Standard & Poor's 500 Composite Index is a broad based unmanaged but
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
The Core Growth Fund commenced investment operations on January 2, 1996, with
the offering of class A shares and subsequently offered 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. This
blended class I share performance has been adjusted to take into account the
fact that class I shares have no initial sales charge (load). This blended
performance has not been adjusted to take into account differences in class
specific operating expenses. Because operating expenses of class I shares are
lower than those of class A shares, the blended class I share performance is
lower than the performance of class I shares would have been had class I shares
been offered for the entire period.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and
-1-
<PAGE> 141
hold shares of the fund. The table is supplemented as follows:
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS):
<TABLE>
<CAPTION>
CORE
GROWTH FUND
-----------
<S> <C>
Management Fee..................................... 0.75%
Distribution and Service (12b-1) Fee............... 0.00%
Other Expenses..................................... 0.78%
----
Total Annual Fund Operating Expenses............... 1.53%
Expense Reimbursement............................ (0.35)%(1)
----
Net Expenses..................................... 1.18%(2)
----
</TABLE>
- -----------------------
(1) MFS has contractually agreed, subject to reimbursement, to bear the fund's
expenses such that "Other Expenses" do not exceed 0.40% annually. 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 the fund's 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 0.40% annually. The
obligation of MFS to bear the fund's "Other Expenses" pursuant to this
arrangement, and the fund's obligation to pay the reimbursement fee 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 January 1,
2003. MFS may, in its discretion, terminate this contractual arrangement at
an earlier date, provided that the arrangement will continue until at least
January 1, 2003 unless terminated with the consent of the board of trustees
which oversees the fund.
(2) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. 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. Had these fee reductions been taken into
account, "Net Expenses" would be lower, and for class I shares would be
1.15%.
EXAMPLE OF EXPENSES. The "Example of Expenses" table is intended to help
you compare the cost of investing in the fund with the cost of investing in
other mutual funds. The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses"
for the first year, and the fund's "Total Annual Fund Operating
Expenses" for subsequent years (see Expense Table).
The table is supplemented as follows:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
CLASS I SHARES $120 $449 $801 $1,794
</TABLE>
3. DESCRIPTION OF SHARE CLASSES
The "Description of Share Classes" 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; and
-2-
<PAGE> 142
- 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).
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, on behalf of their clients (i) initially invest
at least $100,000 in class I shares of the fund or (ii) have, at the
time of purchase of class I shares, aggregate assets of at least $10
million invested in class I shares of the fund either alone or in
combination with investments in class I shares of other MFS Funds. MFD
may accept purchases that do not meet these dollar qualification
requirements if it believes, in its sole discretion, that these
requirements will be met within a reasonable period of time.
Additional investments may be made in any amount; 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 a 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 funds' 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.
-3-
<PAGE> 143
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is intended to help you understand the fund's
financial performance. It is supplemented as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
CORE GROWTH FUND AUGUST 31, 1999 AUGUST 31, 1998 AUGUST 31, 1997*
--------------- --------------- ----------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 14.46 $ 15.84 $ 12.99
------- ------- -------
Income from investment operations# -
Net investment income (loss)ss. $ -- $ (0.01) $ 1.50
Net realized and unrealized gain on investments and
foreign currency 7.33 1.26 1.35
------- ------- -------
Total from investment operations $ 7.33 $ 1.25 $ 2.85
------- ------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ (1.20) $ --
From net realized gain on investments and foreign
currency transactions (2.32) (1.43) --
------- ------- -------
Total distributions declared to shareholders $ (2.32) $ (2.63) $ --
------- ------- -------
Net asset value - end of period $ 19.47 $ 14.46 $ 15.84
------- ------- -------
Total return 54.40% 8.82% 21.94%++
Ratios (to average net assets)/Supplemental datass.:
Expenses## 0.71% 0.89% 1.48%+
Net investment income (loss) (0.02)% (0.06)% 14.08%+
Portfolio turnover 240% 261% 1,043%
Net assets at end of period (000 omitted) $10,285 $ 1,415 $ 1,695
ss. The investment adviser voluntarily waived its fee for certain of the periods indicated. If this fee had been incurred by the
fund, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ (0.14) $ (0.13) $ 1.40
Ratios (to average net assets):
Expenses## 1.46% 1.65% 2.35%+
Net investment income (loss) (0.77)% (0.81)% 13.20%+
</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 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's expenses are calculated
without reduction for this expense offset arrangement.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000
-4-
<PAGE> 144
[MFS(R) CORE GROWTH FUND LOGO]
JANUARY 1, 2000
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------
This Prospectus describes the MFS(R) Core Growth Fund. The
fund's investment objective is capital appreciation.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 145
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary...................................... 1
II Expense Summary.......................................... 6
III Certain Investment Strategies and Risks.................. 9
IV Management of the Fund................................... 10
V Description of Share Classes............................. 11
VI How to Purchase, Exchange and Redeem Shares.............. 15
VII Investor Services and Programs........................... 19
VIII Other Information........................................ 21
IX Financial Highlights..................................... 23
Appendix A -- Investment Techniques and Practices........ A-1
</TABLE>
<PAGE> 146
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's investment objective is capital appreciation. The fund's
objective may be changed without shareholder approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its total
assets in common stocks and related securities, such as preferred stock,
convertible securities and depositary receipts, of well-known and
established companies which the fund's investment adviser, Massachusetts
Financial Services Company (referred to as MFS or the adviser), believes
have above-average growth potential.
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 that may accelerate growth
The fund may also invest in emerging growth companies. Emerging growth
companies are companies that MFS believes are either early in their life
cycle but have potential to become major enterprises, or are major
enterprises whose rates of earnings growth are expected to accelerate
because of special factors, such as rejuvenated management, new products,
changes in consumer demand, or basic changes in the economic environment.
Emerging growth companies may be of any size, and MFS would expect these
companies to have products, technologies, management, markets and
opportunities which will facilitate earnings growth over time that is well
above the growth rate of the overall economy and the rate of inflation. The
fund's investments may include securities listed on a securities exchange
or traded in the over-the-counter markets.
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 (such as
an analysis of earnings, cash flows, competitive position and management's
abilities) performed by the fund's portfolio manager and MFS' large group
of equity research analysts.
The fund may invest in foreign securities through which it may have
exposure to foreign currencies.
The fund has engaged and may engage in active and frequent trading to
achieve its principal investment strategies.
1
<PAGE> 147
-- PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
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 disappointing earnings results.
- Growth Companies Risk: This is the risk that the prices of growth
company securities held by the fund 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 or disappointing growth company earnings results.
- Emerging Growth Companies Risk: Investments in emerging growth companies
may be subject to more abrupt or erratic market environments and may
involve greater risks than investments in other companies. Emerging
growth companies often:
- have limited product lines, markets and financial resources
- are dependent on management by one or a few key individuals
- have shares which suffer steeper than average price declines after
disappointing earnings reports and are more difficult to sell at
satisfactory prices.
- Over-the-Counter Risk: OTC transactions involve risks in addition to
those associated with transactions in securities traded on exchanges.
OTC-listed companies may have limited product lines, markets or financial
resources. Many OTC stocks trade less frequently and in smaller volume
than exchange-listed stocks. The values of these stocks may be more
volatile than exchange-listed stocks, and the fund may experience
difficulty in purchasing or selling these securities at a fair price.
2
<PAGE> 148
- Foreign Securities Risk: 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, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. 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. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in the fund's foreign currency
holdings. By entering into forward foreign currency exchange
contracts, the fund may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of forward
contracts entered into for the purpose of increasing return, the
fund may sustain losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk that the party
with which the fund enters the contract may fail to perform its
obligations to the fund.
- Active or Frequent Trading Risk: The fund has engaged and 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 as compared to a fund with less
active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could detract
from the fund's performance.
- 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.
3
<PAGE> 149
-- 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 changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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. The chart and related notes do not take into account any sales
charges (loads) 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.
[Performance Graph]
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<S> <C>
1996 46.02%
1997 32.06%
1998 36.92%
</TABLE>
The total return for the nine-month period ended September 30, 1999 was
13.76%. During the period shown in the bar chart, the highest quarterly
return was 27.05% (for the calendar quarter ended December 31, 1998) and
the lowest quarterly return was (12.45)% (for the calendar quarter ended
September 30, 1998).
4
<PAGE> 150
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and various other
market indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year Life*
<S> <C> <C>
Class A shares 30.42% 36.03%
Class B shares N/A N/A
Class C shares N/A N/A
Standard & Poor's 500 Composite Index+** 28.58% 28.23%
Average growth fund++ 23.42% 22.24%
</TABLE>
- ---------------
* Fund performance figures are for the period from the commencement of
the fund's investment operations on January 2, 1996, through December
31, 1998. Class B and class C shares were not available for sale during
the period. Index and Lipper average returns are from January 1, 1996.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
** The Standard & Poor's 500 Composite Index is a broad based unmanaged,
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange, and over-the-counter market.
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge.
5
<PAGE> 151
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price)... 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds, whichever
is less)........................ See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
...........................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees................... 0.75% 0.75% 0.75%
Distribution and Service (12b-1)
Fees(2)........................... 0.35% 1.00% 1.00%
Other Expenses.................... 0.78% 0.78% 0.78%
------ ------ ------
Total Annual Fund Operating
Expenses.......................... 1.88% 2.53% 2.53%
Expense Reimbursement(3)........ (0.35)% (0.35)% (0.35)%
------ ------ ------
Net Expenses(4)................. 1.53% 2.18% 2.18%
</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) MFS has contractually agreed, subject to reimbursement, to bear the
fund's expenses such that "Other Expenses" do not exceed 0.40%
annually. 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 the fund's
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 0.40% annually. The obligation of MFS to bear
the fund's "Other Expenses" pursuant to this arrangement, and the
fund's obligation to pay the reimbursement fee 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 January 1, 2003.
MFS may, in its discretion, terminate this contractual arrangement at
an earlier date, provided that the arrangement will continue until at
least January 1, 2003 unless terminated with the consent of the board
of trustees which oversees the fund.
6
<PAGE> 152
(4) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent, and may enter into other
such arrangements and directed brokerage arrangements (which would also
have the effect of reducing the fund's expenses). Any such fee
reductions are not reflected in the table. Had these fee reductions
been taken into account, "Net Expenses" would be 1.50% for class A and
2.15% for each of classes B and C.
7
<PAGE> 153
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses" for
the first year, and the fund's "Total Annual Fund Operating Expenses" for
subsequent years (see Expense Table).
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $623 $1,005 $1,412 $2,544
Class B shares(1)
Assuming redemption at end of
period 621 1,054 1,514 2,680
Assuming no redemption 221 754 1,314 2,680
Class C shares
Assuming redemption at end of
period 321 754 1,314 2,839
Assuming no redemption 221 754 1,314 2,839
</TABLE>
---------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A expenses.
8
<PAGE> 154
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
In addition, 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's defensive
investment position may not be effective in protecting its value.
9
<PAGE> 155
IV 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 $122.8 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of
assets in equity securities, approximately $21.2 billion of assets in fixed
income funds and fixed income portfolios and approximately $8.9 billion of
assets in foreign securities. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the fund pays MFS an annual management fee as set forth
in the Expense Summary. For fiscal year 1999, this fee was waived.
-- PORTFOLIO MANAGER
The fund's portfolio manager is Stephen Pesek, a Senior Vice President of
MFS. Mr. Pesek has been employed as a portfolio manager by the adviser
since 1994 and has been the portfolio manager of the fund since the fund's
inception in January 1996.
-- 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.
-- 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.
10
<PAGE> 156
V DESCRIPTION OF SHARE CLASSES
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 purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), 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 0.50% 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>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
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.
11
<PAGE> 157
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.
In addition, 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:
- 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 (referred to as 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;
- 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; and
- the plan has not redeemed its class B shares in the MFS funds in
order to purchase class A shares under this category.
- 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
12
<PAGE> 158
- 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.
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
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.
13
<PAGE> 159
-- 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
appreciation or 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, which means that the CDSC will be applied
against the lesser of your direct investment or the total cost of your
shares. The applicability of a CDSC will not be affected by exchanges or
transfers of registration, except as described in the SAI.
-- 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 0.50% for class
A shares (0.25% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25% service
fee), 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. The class A distribution and service
fee is currently 0.35% annually; the remaining 0.15% class A distribution
and service fee may only be implemented upon approval by the board of
trustees which oversees the fund.
14
<PAGE> 160
VI 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 by having your financial
adviser process your purchase. The minimum initial investment is $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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC 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
15
<PAGE> 161
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 may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and policies are described
below under the captions "Right to Reject or Restrict Purchase and Exchange
Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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.
16
<PAGE> 162
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS funds may
consider trading done in multiple accounts under common ownership or
control.
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.
17
<PAGE> 163
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.
18
<PAGE> 164
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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
19
<PAGE> 165
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 $100,000 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.
20
<PAGE> 166
VIII OTHER INFORMATION GRAPHIC
-- 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). The New York Stock Exchange is closed on most national
holidays and Good Friday. 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 any
realized net capital gains) to shareholders as dividends at least annually.
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on
your particular tax situation.
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 distributions you receive from the fund, whether you take the
distributions in
21
<PAGE> 167
cash or reinvest them in additional shares. Distributions designated as
capital gain dividends are taxable as long-term capital gains. Other
distributions 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.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if 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 will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to the fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding. Prospective investors should read the fund's
Account Application for additional information regarding backup withholding
of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
-- 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.
22
<PAGE> 168
IX FINANCIAL HIGHLIGHTS GRAPHIC
The financial highlights table is intended to help you understand the
fund's financial performance since the fund's inception. 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. The fund's Annual
Report is available upon request by contacting MFSC (see back cover for
address and telephone number). These financial statements are incorporated
by reference into the SAI. The fund's independent auditors are Ernst &
Young LLP.
23
<PAGE> 169
CLASS A SHARES
...........................................................................
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED AUGUST 31, ENDED
------------------------ AUGUST 31,
1999 1998 1997 1996*
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data
(for a share outstanding throughout
each period):
Net asset value - beginning of period $14.44 $15.82 $12.33 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment income (loss)sec. $ -- $(0.01) $ 1.24 $(0.01)
Net realized and unrealized gain on
investments and foreign currency 7.34 1.26 3.93 2.34
------ ------ ------ ------
Total from investment operations $ 7.34 $ 1.25 $ 5.17 $ 2.33
------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $ -- $(1.20) $ -- $ --
From net realized gain on investments
and foreign currency transactions (2.32) (1.43) (1.68) --
------ ------ ------ ------
Total distributions declared to
shareholders $(2.32) $(2.63) $(1.68) $ --
------ ------ ------ ------
Net asset value - end of period $19.46 $14.44 $15.82 $12.33
====== ====== ====== ======
Total return 54.33% 8.75% 45.22% 23.30%++
Ratios (to average net assets)/
Supplemental datasec.:
Expenses## 0.88% 0.89% 1.45% 1.50%+
Net investment income (loss) (0.01)% (0.03)% 9.12% (0.11)%+
Portfolio turnover 240% 261% 1,043% 204%
Net assets at end of period (000
omitted) $1,837 $1,495 $1,061 $ 686
sec.The investment adviser and the distributor voluntarily waived their
fees for the periods indicated. In addition, for the period ended
August 31, 1996, subject to reimbursement by the fund, the investment
adviser agreed to maintain the expenses of the fund, exclusive of
management and distribution and service fees, at not more than 1.50%
of average daily net assets. If these fees had been incurred by the
fund and other expenses had not been limited, the net investment
income (loss) per share and the ratios would have been:
Net investment income (loss) $(0.22) $(0.17) $1.06 $ (0.18)
Ratios (to average net assets):
Expenses## 2.13% 2.15% 2.82% 4.28%+
Net investment income (loss) (1.26)% (1.29)% 7.75% (2.34)%+
</TABLE>
*For the period from the commencement of the fund's investment operations,
January 2, 1996, through August 31, 1996.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The fund 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's expenses are
calculated without reduction for this expense offset arrangement.
24
<PAGE> 170
[Appendix A Graphic]
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are also
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<CAPTION>
SYMBOLS X permitted -- not permitted
-------------------------------------------------------
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities X
Stripped Mortgage-Backed Securities --
Corporate Securities X
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities X
Variable and Floating Rate Obligations X
Zero Coupon Bonds, Deferred Interest
Bonds and
PIK Bonds --
Equity Securities X
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts X
Dollar-Denominated Foreign Debt
Securities X
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities X
Inverse Floating Rate Obligations --
</TABLE>
A-1
<PAGE> 171
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
................................................................................
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds X
Closed-End Funds X
Lending of Portfolio Securities X
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies X
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options X
"Yield Curve" Options X
Repurchase Agreements X
Restricted Securities X
Short Sales --
Short Sales Against the Box --
Short Term Instruments X
Swaps and Related Derivative Instruments X
Temporary Borrowings X
Temporary Defensive Positions X
Warrants X
"When-issued" Securities X
</TABLE>
A-2
<PAGE> 172
MFS(R) CORE 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 January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
MCG-1 12/99 129M 92/892
<PAGE> 173
[MFS CORE GROWTH FUND LOGO]
JANUARY 1, 2000
<TABLE>
<S> <C>
[MFS 75 YEARS LOGO] STATEMENT OF ADDITIONAL
INFORMATION
A SERIES OF MFS SERIES TRUST I
500 BOYLSTON STREET, BOSTON, MA 02116 This SAI is divided into two Parts -- Part I and
(617) 954-5000 Part II. Part I contains information that is
particular to the Fund, while Part II contains
This Statement of Additional Information, as information that generally applies to each of
amended or supplemented from time to time (the the funds in the MFS Family of Funds (the "MFS
"SAI"), sets forth information which may be of Funds"). Each Part of the SAI has a variety of
interest to investors but which is not appendices which can be found at the end of Part
necessarily included in the Fund's Prospectus I and Part II, respectively.
dated January 1, 2000. This SAI should be read THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED
in conjunction with the Prospectus. The Fund's FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY
financial statements are incorporated into this IF PRECEDED OR ACCOMPANIED BY A CURRENT
SAI by reference to the Fund's most recent PROSPECTUS.
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 of Part II
of this SAI for address and phone number).
</TABLE>
MCG-13 12/99 600
<PAGE> 174
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 1
VIII Tax Considerations.......................................... 2
IX Independent Auditors and Financial Statements............... 2
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
</TABLE>
<PAGE> 175
I DEFINITIONS
"Fund" - MFS(R) Core Growth Fund, a diversified series of the Trust.
"Trust" - MFS Series Trust I, a Massachusetts business Trust, organized on July
22, 1986. The Trust was known as "MFS Lifetime Managed Sectors Fund" prior to
August 1, 1993, and as "Lifetime Managed Sectors Trust" prior to August 3, 1992.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated January 1, 2000, as amended or
supplemented from time to time.
II 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.
III 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.
IV 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.
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 certain other MFS Funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS Funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
V 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.
VI 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.
VII 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 A to the Prospectus, and are more fully
described, together with their associated risks, in Part II of this SAI. The
following percentage limitations apply to these investment techniques and
practices:
- - Foreign Securities may not exceed 35% of net assets
- - Emerging Growth Companies may not exceed 35% of net assets
- - Lending of Portfolio Securities may not exceed 30% of the Fund's net assets
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 the Fund or class, as applicable, or (ii) 67% or more of the
outstanding shares of the Trust or the Fund or class, as applicable, present at
a meeting at which holders of more than 50% of the outstanding shares of the
Trust or the Fund or class, as applicable, are represented in person or by
proxy). Except with respect to the Fund's policy on borrowing and investing in
illiquid securities, these investment restrictions and policies are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy. In the
event of a violation of nonfundamental investment policy (1), the Fund will
reduce the percentage of its assets invested in illiquid investments in due
course, taking into account the best interests of shareholders.
Part I -- 1
<PAGE> 176
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 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
("1933 Act") in selling a portfolio security;
(3) 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;
(4) 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
(5) 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;
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities
of issuers whose principal business activities are in the same industry
(except obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements collateralized by
such obligations).
In addition, 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 for the purpose of exercising control or management;
(3) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross assets.
For purposes of this restriction, collateral arrangements with respect to
any type of option (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any short
sale, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(4) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry.
(5) with respect to 75% of its total assets, (i) purchase more than 10% of the
outstanding voting securities of any one issuer; or (ii) purchase
securities of any issuer if as a result more than 5% of the Fund's total
assets would be invested in that issuer's securities. This limitation does
not apply to obligations of the U.S. Government or its agencies or
instrumentalities.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for each of the two years ended August
31, 1998 and August 31, 1999, 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 -- 2
<PAGE> 177
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 and President (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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director. Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor. Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer. Address: 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: Boston,
Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
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);
Cambridge Nutraceuticals (professional nutritional products), Chief Executive
Officer. Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to June, 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director. Address:
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------------------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS 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.), an indirect subsidiary of Sun Life Assurance Company of Canada.
Part I -- A-1
<PAGE> 178
PART I - APPENDIX B
TRUSTEE COMPENSATION
While the Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, the Trustees are currently waiving their
rights 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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT
BENEFIT TOTAL
TRUSTEE ACCRUED ESTIMATED TRUSTEE FEES
FEES AS PART OF CREDITED FROM FUND AND
FROM FUND YEARS OF FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $ 0 $ 0 6 $259,430
Marshall N. Cohan 0 0 6 143,259
Lawrence H. Cohn, M.D. 0 0 16 153,579
The Hon. Sir J. David Gibbons, KBE 0 0 6 130,059
Abby M. O'Neill 0 0 7 130,059
Walter E. Robb, III 0 0 6 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 0 0 18 157,714
Ward Smith 0 0 10 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ended August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- ---------------------------------------------
<S> <C> <C> <C> <C>
$ 0 $0 $0 $ 0 $ 0
</TABLE>
- -------------------------------
(4) Other funds in the MFS Fund complex provide retirement benefits to the
Trustees. The fees for the Fund are currently being waived by the Trustees
Part I -- B-1
<PAGE> 179
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $0 $47,077 $847 $6,611 $ 0 $7,458
August 31, 1998 0 23,926 456 2,506 1,241 2,962
August 31, 1997 0 12,775 27* 0 2,233 27
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 180
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
- --------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
August 31, 1999 $ 0 $0 $0 $0 $0 $0
August 31, 1998 0 0 0 0 0 0
August 31, 1997 0 0 0 0 0 0
</TABLE>
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>
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
<S> <C>
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, 1999, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $0 $0 $0
Class B Shares 0 0 0
Class C Shares 0 0 0
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE> 181
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $ 27,538
August 31, 1998 13,950
August 31, 1997 28,023
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- -------------------------------------------------------------
<S> <C>
General Electric Co. $146,006
Morgan Stanley Dean Witter & Co. 85,812
</TABLE>
Part I -- E-1
<PAGE> 182
PART I - APPENDIX F
SHARE OWNERSHIP
MFS CORE GROWTH FUND
OWNERSHIP BY TRUSTEES AND OFFICERS
Except with respect to Lawrence H. Cohn who as of September 30, 1999 owned 6.17%
of Class A shares, as of September 30, 1999, the Trustees and officers of the
Trust as a group owned less than 1% of any class of the Fund's shares, not
including 528,295 Class I shares of the Fund (which represent approximately 100%
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 September 30, 1999, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
TRS MFS DEF Contribution Plan 84.82% of Fund shares
c/o Mark Leary, 19th Floor
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
</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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
...........................................................................................
<S> <C> <C>
Ruth M. Scott 13.20% of Class A shares
Westport, MA 02790-1506
...........................................................................................
MFS Heritage Trust Company Trustee 9.12% of Class A shares
IRA R/O Howard Kahalnik
Deerfield, IL 60015-3628
...........................................................................................
MFS Heritage Trust Company Trustee 5.59% of Class A shares
IRA R/O Peter G. Harwood
Concord, MA 01742-5217
...........................................................................................
Kelly W. Pesek 21.52% of Class A shares
Weston, MA 02493-2244
...........................................................................................
John David Davenport TTEE 15.79% of Class A shares
The John David Davenport
1994 Revocable Trust
MFS Investment Mgmt. Attn: Arnold D. Scott
500 Boylston Street
Boston, MA 02116-3740
...........................................................................................
Lawrence H. Cohn 6.17% of Class A shares
Chestnut Hill, MA 02467-2826
...........................................................................................
TRS MFS DEF Contribution Plan 100.00% of Class I shares
c/o Mark Leary 19th Floor
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
...........................................................................................
</TABLE>
Part I -- F-1
<PAGE> 183
PART I - APPENDIX G
PERFORMANCE INFORMATION
................................................................................
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
--------------- (INCLUDING (WITHOUT ANY Distribution
1 YEAR LIFE* WAIVERS) WAIVERS) RATE+
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (4.75%) 47.00% 33.26% N/A N/A N/A
Class A Shares, at net asset value 54.33% 35.04% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) N/A N/A N/A N/A N/A
Class B Shares, at net asset value N/A N/A N/A N/A N/A
Class C Shares, with CDSC (1% for
first year) N/A N/A N/A N/A N/A
Class C Shares, at net asset value N/A N/A N/A N/A N/A
Class I Shares, at net asset value 54.40% 35.10% N/A N/A N/A
</TABLE>
- -------------------------------
* From commencement of the Fund's investment operations on January 2, 1996.
+ Annualized, based upon the last distribution.
The Fund commenced investment operations on January 2, 1996 with the offering of
class A shares and subsequently offered 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. This blended class I share
performance has been adjusted to take into account the fact that class I shares
have no initial sales charge (load). This blended performance has not been
adjusted to take into account differences in class specific operating expenses.
Because operating expenses of class I shares are lower than those of class A
shares, this blended class I share performance is lower than the performance of
class I shares would have been had class I shares been offered for the entire
period.
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
Part I -- G-1
<PAGE> 184
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE> 185
MFS(R) SCIENCE AND TECHNOLOGY FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2000. 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 "Description of Share Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's performance
over time. The table is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
1 YEAR LIFE*
------ -----
<S> <C> <C>
Class I shares 46.29% 34.62%
NASDAQ Composite Index#+ 39.95% 30.65%
Average science & technology fund++ 51.44% 28.21%
</TABLE>
- ----------------------------
* Fund performance figures are for the period from the commencement of the
Fund's investment operations on January 2, 1997, through December 31, 1998.
Index and Lipper average returns are from January 1, 1997.
# The NASDAQ Composite Index is a broad based unmanaged index of common
stocks traded on the National Association of Securities Dealers Automated
Quotation System.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
The Science and Technology Fund commenced investment operations on January 2,
1997, with the offering of class A shares and class I shares.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):
<TABLE>
<CAPTION>
SCIENCE AND
TECHNOLOGY FUND
---------------
<S> <C>
Management Fees................................. 0.75%
Distribution and Service (12b-1) Fees........... 0.00%
Other Expenses.................................. 1.17%
----
Total Annual Fund Operating Expenses............ 1.92%
Fee Waiver.................................... (0.75)%(1)
----
Net Expenses.................................. 1.17%(2)
----
</TABLE>
- -----------------------
(1) MFS has contractually agreed to waive its management fee. This contractual
arrangement will continue until at least January 1, 2001, unless modified
with the consent of the board of trustees, which oversees the fund.
(2) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. The fund may enter into other
similar arrangements and directed
-1-
<PAGE> 186
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.
Had these fee reductions been taken into account, "Net Expenses" would be
lower, and for class I shares would be 1.16%.
EXAMPLE OF EXPENSES. The "Example of Expenses" table is intended to help
you compare the cost of investing in the fund with the cost of investing in
other mutual funds. The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses"
for the first year, and the fund's "Total Annual Fund Operating
Expenses" for subsequent years (see Expense Table).
The table is supplemented as follows:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
------ ------ ------ -------
<S> <C> <C> <C> <C>
CLASS I SHARES $119 $530 $967 $2,182
</TABLE>
3. DESCRIPTION OF SHARE CLASSES
The "Description of Share Classes" 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; and
- 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.
In no event will a 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 funds' 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.
-2-
<PAGE> 187
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is intended to help you understand the fund's
financial performance. It is supplemented as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
SCIENCE AND TECHNOLOGY FUND AUGUST 31, 1999 AUGUST 31, 1998 AUGUST 31, 1997*
--------------- --------------- ----------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.50 $ 12.53 $ 10.00
-------- -------- --------
Income from investment operations# -
Net investment income (loss)ss. $ (0.22) $ (0.02) $ 1.05
Net realized and unrealized gain (loss) on investments
and foreign currency 7.57 (0.10) 1.48
-------- -------- --------
Total from investment operations $ 7.35 $ (0.12) $ 2.53
-------- -------- --------
Less distributions declared to shareholders -
From net investment income $ -- $ (0.91) $ --
From net realized gain on investments and foreign
currency transactions (0.51) $ -- --
-------- -------- --------
Total distributions declared to shareholders $ (0.51) $ (0.91) $ --
-------- -------- --------
Net asset value - end of period $ 18.34 $ 11.50 $ 12.53
-------- -------- --------
Total return 65.25% (0.61)% 25.30%++
Ratios (to average net assets)/Supplemental datass.:
Expenses## 1.17% 0.88% 1.41%+
Net investment income (loss) (0.84)% (0.18)% 13.11%+
Portfolio turnover 104% 29% 792%
Net assets at end of period (000 omitted) $ 2,530 $ 1,796 $ 1,637
ss. The investment adviser voluntarily waived its fee for the periods
indicated. If this fee had been incurred by the fund, the net investment
income (loss) per share and the ratios would have been:
Net investment income (loss) $ (0.41) $ (0.20) $ 0.98
Ratios (to average net assets):
Expenses## 1.92% 1.68% 2.28%+
Net investment income (loss) (1.59)% (0.98)% 12.24%+
</TABLE>
* For the period from the commencement of the fund's investment operations,
January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund 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's expenses are calculated
without reduction for this expense offset arrangement.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000
-3-
<PAGE> 188
[MFS(R) SCIENCE AND TECHNOLOGY FUND]
JANUARY 1, 2000
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------
This Prospectus describes the MFS Science and Technology
Fund. The fund's investment objective is capital
appreciation.
THIS PROSPECTUS DESCRIBES THREE CLASSES OF SHARES FOR THE
FUND. CURRENTLY, ONLY CLASS A SHARES ARE AVAILABLE FOR
PURCHASE. THESE CLASS A SHARES ARE ONLY AVAILABLE FOR
PURCHASE AT NET ASSET VALUE AND MAY ONLY BE SOLD TO
RESIDENTS OF MASSACHUSETTS WHO ARE:
- EMPLOYEES (OR CERTAIN RELATIVES OF EMPLOYEES) OF
MASSACHUSETTS FINANCIAL SERVICES COMPANY (REFERRED TO
AS MFS OR THE ADVISER) AND ITS AFFILIATES; OR
- MEMBERS OF THE GOVERNING BOARDS OF THE VARIOUS FUNDS
SPONSORED BY MFS.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 189
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary...................................... 1
II Expense Summary.......................................... 8
III Certain Investment Strategies and Risks.................. 10
IV Management of the Fund................................... 11
V Description of Share Classes............................. 12
VI How to Purchase, Exchange and Redeem Shares.............. 16
VII Investor Services and Programs........................... 20
VIII Other Information........................................ 22
IX Financial Highlights..................................... 24
Appendix A -- Investment Techniques and Practices........ A-1
</TABLE>
<PAGE> 190
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's investment objective is capital appreciation. The fund's
objective may be changed without shareholder approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its total
assets in common stocks and related securities, such as preferred stock,
convertible securities and depositary receipts, of companies that the
fund's investment adviser, MFS believes have above average growth potential
and will benefit from scientific and technological advances and
improvements. These companies are in fields such as:
- computer software and hardware
- semiconductors
- minicomputers
- peripheral equipment
- scientific instruments
- telecommunications
- pharmaceuticals
- environmental services
- chemicals
- synthetic materials
- defense and commercial electronics
- data storage and retrieval
- biotechnology
- health care and medical supplies
The fund will invest in science and technology companies of any size
including smaller, lesser known companies that are in the developing stages
of their life cycle and offer the potential for accelerated earnings or
revenue growth (emerging growth companies).
In selecting securities for the fund 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; and
- substantial barriers to new entry in the industry;
- a strong management team with a clearly defined strategy; and
- a catalyst that may accelerate growth.
1
<PAGE> 191
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 (such as
an analysis of earnings, cash flows, competitive position and management's
abilities) performed by the fund's portfolio manager and MFS' large group
of equity research analysts. The fund's investments may include securities
listed on a securities exchange or traded in the over-the-counter markets.
The fund may invest in other securities that the adviser believes offer an
opportunity for capital appreciation. These securities may include fixed
income securities, including lower rated bonds, when relative values make
such purchases attractive. Lower rated bonds, commonly referred to as junk
bonds, are bonds assigned low credit ratings by credit agencies or which
are unrated and considered by MFS to be comparable to lower rated bonds.
The fund may also invest in foreign securities (including emerging market
securities) and may have exposure to foreign currencies through its
investment in these securities, its direct holdings of foreign currencies
or through its use of foreign currency exchange contracts for the purchase
or sale of a fixed quantity of foreign currency at a future date.
The fund may also engage in short sales where the fund borrows a security
it does not own and then sells it in anticipation of a fall in the
security's price. In a short sale, the fund must replace the security it
borrowed by purchasing the security at its market value at the time of
replacement. The fund may also engage in short sales "against the box"
where the fund owns or has the right to obtain, at no additional cost, the
securities that are sold short.
The fund has engaged and may engage in active and frequent trading to
achieve its principal investment strategies.
-- PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
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 disappointing earnings results.
2
<PAGE> 192
- Science and Technology Companies Risks:
- Company Risk: Companies in the science and technology industries
face special risks. For example, their products may fall out of
favor or become obsolete in relatively short periods of time. Also,
many of their products may not become commercially successful.
Therefore, investments in the stocks of science and technology
companies can be volatile.
- Concentration Risk: The fund's investment performance will be
closely tied to the performance of companies in a limited number of
industries. Companies in a single industry often are faced with the
same obstacles, issues and regulatory burdens, and their securities
may react similarly and more in unison to these or other market
conditions. These price movements may have a larger impact on the
fund than on a fund with a more broadly diversified portfolio.
- Emerging Growth and Growth Companies Risk: Investments in emerging
growth and growth companies may be subject to more abrupt or erratic
market movements and may involve greater risks than investments in other
companies. In addition, emerging growth companies often:
- have limited product lines, markets and financial resources
- are dependent on management by one or a few key individuals
- have shares which suffer steeper than average price declines after
disappointing earnings reports and are more difficult to sell at
satisfactory prices
- Small Cap Companies Risk: Investments in small cap companies tend to
involve more risk and be more volatile than investments in larger
companies. Small cap companies may be more susceptible to market declines
because of their limited product lines, financial and management
resources, markets and distribution channels. Their shares may be more
difficult to sell at satisfactory prices during market declines.
- Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those incurred by transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in
smaller volume than exchange-listed stocks. The values of these stocks
may be more volatile than exchange-listed stocks, and the fund may
experience difficulty in purchasing or selling these securities at a fair
price.
- Short Sales Risk: The fund will suffer a loss if it sells a security
short and the value of the security rises rather than falls. Because the
fund must purchase the security it borrowed in a short sale at prevailing
market rates, the potential loss may be greater for a short sale than for
a short sale "against the box" and is potentially unlimited.
- Foreign Markets Risk: Investing in foreign securities involves risks
relating to political, social and economic developments abroad, as well
as risks resulting
3
<PAGE> 193
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, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. 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. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in the fund's foreign currency
holdings. By entering into forward foreign currency exchange
contracts, the fund may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of forward
contracts entered into for the purpose of increasing return, the
fund may sustain losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk that the party
with which the fund enters the contract may fail to perform its
obligations to the fund.
- Emerging Markets Risk: 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 significantly higher or lower
rates of return than developed markets, and significantly greater
risks, to investors.
- Fixed Income Securities Risk:
- Interest Rate Risk: When interest rates rise, the prices of fixed
income securities in the fund's portfolio will generally fall.
Conversely, when
4
<PAGE> 194
interest rates fall, the prices of fixed income securities in the
fund's portfolio will generally rise.
- Maturity Risk: This interest rate risk will generally affect the
price of a fixed income security more if the security has a longer
maturity. The average maturity of the fund's fixed income
investments will affect the volatility of the fund's share price.
- Credit Risk: The fund is subject to the risk that the issuer of a
fixed income security will not be able to pay principal and
interest when due.
- Liquidity Risk: The fixed income securities purchased by the fund
may be traded in the over-the-counter market rather than on an
organized exchange and are subject to liquidity risk. This means
that they may be harder to purchase or sell at a fair price. The
inability to purchase or sell these fixed income securities at a
fair price could have a negative impact on the fund's performance.
- Lower Rated Bonds Risk:
- Higher Credit Risk: Junk bonds are subject to a substantially
higher risk that the issuer will default on payments of principal
and interest than higher rated bonds.
- Higher Liquidity Risk: During recessions and periods of broad
market declines, junk bonds could become less liquid, meaning that
they will be harder to value or sell at a fair price.
- Active or Frequent Trading Risk: The fund has engaged and 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 as compared to a fund with less
active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could detract
from the fund's performance.
- 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.
-- 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 changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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.
5
<PAGE> 195
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares for each calendar year since the fund's inception. The chart and
related notes do not take into account any sales charges (loads) 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.
[Total Return Bar Chart]
<TABLE>
<CAPTION>
MFS SCIENCE AND TECHNOLOGIES FUND TOTAL RETURN
----------------------------------------------
<S> <C>
1997 23.67%
1998 46.20%
</TABLE>
The total return for the nine months ended September 30, 1999 was
16.36%. During the period shown in the bar chart, the highest quarterly
return was 24.86% (for the calendar quarter ended December 31, 1998) and
the lowest quarterly return was (11.99)% (for the calendar quarter ended
September 30, 1998).
6
<PAGE> 196
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and various other
market indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year Life*
<S> <C> <C>
Class A shares 39.25% 31.33%
Class B shares N/A N/A
Class C shares N/A N/A
NASDAQ Composite Index+** 39.95% 30.65%
Average science & technology fund++ 51.44% 28.21%
</TABLE>
- ---------------
* Fund performance figures are for the period from the commencement of
the fund's investment operations on January 2, 1997, through December
31, 1998. Class B and class C shares were not available for sale
during the period. Index and Lipper average returns are from January
1, 1997.
+ Source: Standard & Poor's Micropal
++ Source: Lipper Analytical Services, Inc.
** The NASDAQ Composite Index is a broad based, unmanaged index of common
stocks traded on the National Association of Securities Dealers
Automated Quotation system.
Class A share performance takes into account the deduction of the 4.75%
maximum sales charge.
7
<PAGE> 197
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price)... 4.75% 0.00% 0.00%
Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds, whichever
is less)........................ See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
...........................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees................... 0.75% 0.75% 0.75%
Distribution and Service (12b-1)
Fees(2)........................... 0.50% 1.00% 1.00%
Other Expenses.................... 1.17% 1.17% 1.17%
------ ------ ------
Total Annual Fund Operating
Expenses.......................... 2.42% 2.92% 2.92%
Fee Waiver(3)................... (1.25)% (0.75)% (0.75)%
------ ------ ------
Net Expenses(4)................. 1.17% 2.17% 2.17%
</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) MFS has contractually agreed to waive the fund's management fee. In
addition, the fund's distributor, MFS Fund Distributors, Inc., has
contractually agreed to waive the fund's class A distribution and
service fees. These contractual arrangements will continue until at
least January 1, 2001, unless changed with the consent of the board of
trustees which oversees the fund.
(4) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent, and may enter into other
such arrangements and directed brokerage arrangements (which would also
have the effect of reducing the fund's expenses). Any such fee
reductions are not reflected in the table. Had these fee reductions
been taken into account, "Net Expenses" would have been 1.16% for class
A and 2.16% for each of classes B and C.
8
<PAGE> 198
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses" for
the first year, and the fund's "Total Annual Fund Operating Expenses" for
subsequent years (see table on previous Expense Summary page).
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $589 $1,080 $1,596 $3,010
Class B shares
Assuming redemption at end of
period 620 1,133 1,672 3,071
Assuming no redemption 220 833 1,472 3,071
Class C shares
Assuming redemption at end of
period 320 833 1,472 3,189
Assuming no redemption 220 833 1,472 3,189
</TABLE>
9
<PAGE> 199
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
In addition, 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's defensive
investment position may not be effective in protecting its value.
10
<PAGE> 200
IV 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 $122.8 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of
assets in equity securities, approximately $21.2 billion of assets in fixed
income funds and fixed income portfolios and approximately $8.9 billion of
assets in foreign securities. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the fund pays MFS an annual management fee as set forth
in the Expense Summary. For fiscal year 1999, this fee was waived.
-- PORTFOLIO MANAGER
The fund's portfolio manager is S. Irfan Ali, a Vice President of MFS. Mr.
Ali has been employed as a portfolio manager by MFS since 1993, and has
been the manager of the fund since its inception on January 2, 1997.
-- 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.
-- 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.
11
<PAGE> 201
V DESCRIPTION OF SHARE CLASSES
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 purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), 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 0.50% 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>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
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.
12
<PAGE> 202
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.
In addition, 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:
- 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 (referred to as 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;
- 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; and
- the plan has not redeemed its class B shares in the MFS funds in
order to purchase class A shares under this category.
- 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
13
<PAGE> 203
- 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.
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
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.
14
<PAGE> 204
-- 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
appreciation or 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, which means that the CDSC will be applied
against the lesser of your direct investment or the total cost of your
shares. The applicability of a CDSC will not be affected by exchanges or
transfers of registration, except as described in the SAI.
-- 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 0.50% for class
A shares (0.25% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25% service
fee), 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. The 0.50% class A distribution and
service fees for the fund are currently being waived as described in the
"Expense Summary."
15
<PAGE> 205
VI 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 by having your financial
adviser process your purchase. The minimum initial investment is $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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC 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
16
<PAGE> 206
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 may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and policies are described
below under the captions "Right to Reject or Restrict Purchase and Exchange
Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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.
17
<PAGE> 207
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS funds may
consider trading done in multiple accounts under common ownership or
control.
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.
18
<PAGE> 208
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.
19
<PAGE> 209
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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
20
<PAGE> 210
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 $100,000 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.
21
<PAGE> 211
VIII OTHER INFORMATION GRAPHIC
-- 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). The New York Stock Exchange is closed on most national
holidays and Good Friday. 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 any
realized net capital gains) to shareholders as dividends at least annually.
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on
your particular tax situation.
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 distributions you receive from the fund, whether you take the
distributions in
22
<PAGE> 212
cash or reinvest them in additional shares. Distributions designated as
capital gain dividends are taxable as long-term capital gains. Other
distributions 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.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if 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 will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to the fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding. Prospective investors should read the fund's
Account Application for additional information regarding backup withholding
of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
-- 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.
23
<PAGE> 213
IX FINANCIAL HIGHLIGHTS GRAPHIC
The financial highlights table is intended to help you understand the
fund's financial performance since the fund's inception. 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. The fund's Annual
Report is available upon request by contacting MFSC (see back cover for
address and telephone number). These financial statements are incorporated
by reference into the SAI. The fund's independent auditors are Ernst &
Young LLP.
24
<PAGE> 214
CLASS A SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, PERIOD ENDED
--------------- AUGUST 31,
SCIENCE AND TECHNOLOGY FUND 1999 1998 1997*
----------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data
(for a share outstanding throughout each
period):
Net asset value - beginning of period $11.49 $12.53 $10.00
------ ------ ------
Income from investment operations# -
Net investment income (loss)sec. $(0.08) $(0.03) $ 0.84
Net realized and unrealized gain (loss) on
investments and foreign currency 7.44 (0.10) 1.69
------ ------ ------
Total from investment operations $ 7.36 $(0.13) $ 2.53
------ ------ ------
Less distributions declared to shareholders-
From net investment income $ -- $(0.91) $ --
From net realized gain on investments and
foreign currency transactions (0.51) -- --
------ ------ ------
Total distributions declared to
shareholders $(0.51) $(0.91) $ --
------ ------ ------
Net asset value - end of period $18.34 $11.49 $12.53
====== ====== ======
Total return 65.25% (0.61)% 14.70%++
Ratios (to average net assets)/Supplemental
datasec.:
Expenses## 1.17% 0.88% 1.40%+
Net investment income (loss) (0.83)% (0.19)% 10.73%+
Portfolio turnover 104% 29% 792%
Net assets at end of period (000 omitted) $1,658 $1,045 $ 882
sec.The investment adviser and distributor voluntarily waived their fees
for the periods indicated. If these fees had been incurred by the
fund, the net investment income (loss) per share and the ratios would
have been:
Net investment income (loss) $(0.20) $ (0.21) $ 0.73
Ratios (to average net assets):
Expenses## 2.42% 2.18% 2.77%+
Net investment income (loss) (2.08)% (1.49)% 9.36%+
</TABLE>
*For the period from the commencement of the fund's investment operations,
January 2, 1997, through August 31, 1997.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The fund 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's expenses are
calculated without reduction for this expense offset arrangement.
25
<PAGE> 215
Appendix A MFS SCIENCE AND TECHNOLOGY FUND
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are also
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<S> <C> <C>
SYMBOLS X permitted -- not permitted
-------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage
Obligations and
Multiclass Pass-Through
Securities --
Corporate Asset-Backed
Securities --
Mortgage Pass-Through
Securities X
Stripped Mortgage-Backed
Securities --
Corporate Securities X
Loans and Other Direct
Indebtedness --
Lower Rated Bonds X
Municipal Bonds --
Speculative Bonds X
U.S. Government Securities X
Variable and Floating Rate
Obligations --
Zero Coupon Bonds,
Deferred Interest Bonds
and PIK Bonds --
Equity Securities X
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts X
Dollar-Denominated Foreign
Debt Securities X
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities X
Inverse Floating Rate
Obligations --
Investment in Other
Investment Companies
Open-End Funds X
Closed-End Funds X
Lending of Portfolio
Securities X
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll"
Transactions --
Reverse Repurchase
Agreements --
Options
Options on Foreign
Currencies X
Options on Futures
Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options X
"Yield Curve" Options X
Repurchase Agreements X
Restricted Securities X
Short Sales X
Short Sales Against the Box X
Short Term Instruments X
Swaps and Related
Derivative Instruments X
Temporary Borrowings X
Temporary Defensive
Positions X
Warrants X
"When-issued" Securities X
</TABLE>
A-1
<PAGE> 216
MFS SCIENCE AND TECHNOLOGY 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 January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
INC-1-I 12/99 1M
<PAGE> 217
[MFS(R) SCIENCE AND TECHNOLOGY FUND LOGO]
JANUARY 1, 2000
<TABLE>
<S> <C>
[MFS 75 YEARS LOGO] STATEMENT OF ADDITIONAL
INFORMATION
A SERIES OF MFS SERIES TRUST I
500 BOYLSTON STREET, BOSTON, MA 02116 This SAI is divided into two Parts -- Part I and
(617) 954-5000 Part II. Part I contains information that is
particular to the Fund, while Part II contains
This Statement of Additional Information, as information that generally applies to each of
amended or supplemented from time to time (the the funds in the MFS Family of Funds (the "MFS
"SAI"), sets forth information which may be of Funds"). Each Part of the SAI has a variety of
interest to investors but which is not appendices which can be found at the end of Part
necessarily included in the Fund's Prospectus I and Part II, respectively.
dated January 1, 2000. This SAI should be read THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED
in conjunction with the Prospectus. The Fund's FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY
financial statements are incorporated into this IF PRECEDED OR ACCOMPANIED BY A CURRENT
SAI by reference to the Fund's most recent PROSPECTUS.
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 of Part II
of this SAI for address and phone number).
</TABLE>
INC-13-1 12/99 300
<PAGE> 218
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 1
VIII Tax Considerations.......................................... 3
IX Independent Auditors and Financial Statements............... 3
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
</TABLE>
<PAGE> 219
I DEFINITIONS
"Fund" -- MFS Science and Technology Fund, a diversified series of the Trust.
"Trust" - MFS Series Trust I, a Massachusetts business trust, organized on July
22, 1986. The Trust was known as "MFS Lifetime Managed Sectors Fund" prior to
August 1, 1993, and as "Lifetime Managed Sectors Trust" prior to August 3, 1992.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated January 1, 2000, as amended or
supplemented from time to time.
II 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.
III 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.
IV 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.
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 certain other MFS Funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS Funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
V 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.
VI 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.
VII 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 A to the Prospectus, and are more fully
described, together with their associated risks, in Part II of this SAI. The
following percentage limitations apply to these investment techniques and
practices:
<TABLE>
<CAPTION>
INVESTMENT PERCENTAGE LIMITATION
LIMITATION (BASED ON NET ASSETS)
---------- ---------------------
<S> <C>
Foreign Securities:.......... 50%
Lower Rated Bonds:......... 30%
Securities Lending:........ 30%
Short Sales:............... underlying value
minus collateral:
40% of net assets
</TABLE>
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed without
the approval of the holders of a majority
Part I -- 1
<PAGE> 220
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 the Fund or class, as
applicable, or (ii) 67% or more of the outstanding shares of the Trust or the
Fund or class, as applicable, present at a meeting at which holders of more than
50% of the outstanding shares of the Trust or the Fund or class, as applicable,
are represented in person or by proxy). Except with respect to the Fund's policy
on borrowing and investing in illiquid securities, these investment restrictions
and policies are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy. In the event of a violation of nonfundamental investment
policy (1), the Fund will reduce the percentage of its assets invested in
illiquid investments in due course, taking into account the best interests of
shareholders.
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
("1933 Act") in selling a portfolio security;
(3) issue any senior securities except as permitted by the 1940 Act; for
purposes of this restriction, collateral arrangements with respect to any
type of option (including Options on Futures Contracts, Options, Options
on Stock Indices and Options on Foreign Currencies), short sale, Forward
Contracts, Futures Contracts, any other type of futures contract, and
collateral arrangements with respect to initial and variation margin, are
not deemed to be the issuance of a senior security; or
(4) make loans to other persons; for these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue
of debt securities, the lending of portfolio securities, or the investment
of a Fund's assets in repurchase agreements shall not be considered the
making of a loan; or
(5) 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;
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities
of issuers whose principal business activities are in the same industry
(except obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements collateralized by
such obligations).
In addition, 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 for the purpose of exercising control or management;
(3) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross assets.
For purposes of this restriction, collateral arrangements with respect to
any type of option, (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any short
sale, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(4) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry.
(5) with respect to 75% of its total assets, (i) purchase more than 10% of the
outstanding voting securities of any one issuer; or (ii) purchase
securities of any issuer if as a result more than 5% of the Fund's total
assets would be invested in that issuer's securities. This limitation does
not apply to obligations of the U.S. Government or its agencies or
instrumentalities.
Part I -- 2
<PAGE> 221
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for each of the two years in the period
ended August 31, 1999, 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 -- 3
<PAGE> 222
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 and President (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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director.
Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor. Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer. Address: 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: Boston,
Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
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);
Cambridge Nutraceuticals (professional nutritional products), Chief Executive
Officer. Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to June, 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director. Address:
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------------------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS 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.), an indirect subsidiary of Sun Life Assurance Company of Canada.
Part I -- A-1
<PAGE> 223
PART I - APPENDIX B
TRUSTEE COMPENSATION
While the Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, the Trustees are currently waiving their
rights 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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT
TRUSTEE BENEFIT TOTAL
FEES ACCRUED ESTIMATED TRUSTEE FEES
FROM AS PART OF CREDITED FROM FUNDS
EACH FUND YEARS OF AND FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $0 $0 5 $259,430
Marshall N. Cohan 0 0 5 143,259
Lawrence H. Cohn, M.D. 0 0 15 153,579
The Hon. Sir J. David Gibbons, KBE 0 0 5 130,059
Abby M. O'Neill 0 0 6 130,059
Walter E. Robb, III 0 0 5 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 0 0 17 157,714
Ward Smith 0 0 9 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ended August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUNDS UPON RETIREMENT(4)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- ----------------------------------------
<S> <C> <C> <C> <C>
$0 $0 $0 $0 $0
</TABLE>
- -------------------------------
(4) Other funds in the MFS Fund complex provide retirement benefits to the
Trustees. The fees for the Fund are currently being waived by the Trustees.
Part I -- B-1
<PAGE> 224
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $0 $27,743 $462 $3,963 $ 0 $4,425
August 31, 1998 0 22,302 429 3,519 0 3,948
August 31, 1997 0 10,517 166* 1,845 0 2,011
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 225
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
- --------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
August 31, 1999 $ 0 $0 $0 $0 $0 $0
August 31, 1998 0 0 0 0 0 0
August 31, 1997 0 0 0 0 0 0
</TABLE>
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>
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
<S> <C>
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, 1999, the Fund made no payments under
its Distribution Plan.
Part I -- D-1
<PAGE> 226
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $ 5,192
August 31, 1998 842
August 31, 1997 22,821
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- --------------------------------------------------------------
<S> <C>
CIT Group, Inc. $2,381
</TABLE>
Part I -- E-1
<PAGE> 227
PART I - APPENDIX F
SHARE OWNERSHIP
MFS SCIENCE AND TECHNOLOGY FUND
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 30, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares, not including 139,471
Class I shares of the Fund (which represent approximately 99.99% 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 September 30, 1999, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
TRS MFS DEF Contribution Plan 63.84% of Fund shares
c/o Mark Leary
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
</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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
...........................................................................................
<S> <C>
MFS Heritage Trust Company Trustee 5.66% of Class A shares
IRA R/O Howard Kahalnik
Deerfield, IL 60015-3628
...........................................................................................
MFS Heritage Trust Company Trustee 28.56% of Class A shares
IRA R/O Ned L Rigsbee
Westboro, MA 01581-3607
...........................................................................................
Maura A Shaughnessy 5.68% of Class A shares
Boston, MA 02116-1238
...........................................................................................
John David Davenport TTEE 20.43% of Class A shares
The John David Davenport
1994 Revocable Trust
MFS Invst Mgmt Attn: Arnold D Scott
500 Boylston Street
Boston, MA 02116-3740
...........................................................................................
TRS MFS DEF Contribution Plan 99.99% of Class I shares
c/o Mark Leary
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
...........................................................................................
</TABLE>
Part I -- F-1
<PAGE> 228
PART I - APPENDIX G
PERFORMANCE INFORMATION
................................................................................
MFS SCIENCE AND TECHNOLOGY FUND
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
-------------- (INCLUDING (WITHOUT ANY Distribution
1 YEAR LIFE* WAIVERS) WAIVERS) RATE+
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (4.75%) 57.40% 28.79% N/A N/A N/A
Class A Shares, at net asset value 65.25% 31.17% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) N/A N/A N/A N/A N/A
Class B Shares, at net asset value N/A N/A N/A N/A N/A
Class C Shares, with CDSC (1% for
first year) N/A N/A N/A N/A N/A
Class C Shares, at net asset value N/A N/A N/A N/A N/A
Class I Shares, at net asset value 65.25% 31.17% N/A N/A N/A
</TABLE>
- -------------------------------
* From commencement of the Fund's investment operations on January 2, 1997.
+ Annualized, based upon the last distribution.
The Fund commenced investment operations on January 2, 1997 with the offering of
class A shares and class I shares.
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
Part I -- G-1
<PAGE> 229
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE> 230
MFS(R) NEW DISCOVERY FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2000. 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 "Description of Share Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The table is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
1 YEAR LIFE*
------ -----
<S> <C> <C>
Class I shares 20.18% 29.63%
Russell 2000 Total Return Index#+ (2.55)% 9.20%
Standard & Poor's 500 Composite Index##+ 28.58% 30.95%
Average small cap fund++ (0.23)% 9.81%
</TABLE>
- ---------------------------------
* Fund performance figures are for the period from the commencement of the
Fund's investment operations on January 2, 1997, through December 31, 1998.
Index and Lipper average returns are from January 1, 1997.
# The Russell 2000 Total Return Index is a broad based unmanaged index
comprised of 2,000 of the smallest U.S.-domiciled company common stocks (on
the basis of capitalization) that are traded in the United States on the
New York Stock Exchange, American Stock Exchange and National Association
of Securities Dealers Automated Quotation System.
## The Standard & Poor's 500 Composite Index is a broad based unmanaged but
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
The fund commenced investment operations on January 2, 1997, with the offering
of class A shares and class I shares.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and
-1-
<PAGE> 231
hold shares of the fund. The table is supplemented as follows:
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
<S> <C>
Management Fees....................................... 0.90%
Distribution and Service (12b-1) Fees................. 0.00%
Other Expenses(1)..................................... 0.32%
----
Total Annual Fund Operating Expenses.................. 1.22%
Expense Reimbursement(1)......................... (0.01)%
----
Net Expenses(2).................................. 1.21%
</TABLE>
- -----------------------
(1) MFS has contractually agreed to bear the fund's expenses subject to
reimbursement, such that "Other Expenses", after taking into account the
expense offset arrangement described below, do not exceed 0.25%. These
contractual fee arrangements will continue until at least January 1, 2001,
absent an earlier modification approved by the board of trustees which
oversees the fund.
(2) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. 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. Had these fee reductions been taken into
account, "Net Expenses" would be lower, and would equal 1.20% for class I.
EXAMPLE OF EXPENSES. The "Example of Expenses" table is intended to help you
compare the cost of investing in the fund with the cost of investing in other
mutual funds. The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the timer periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses"
for the first year, and the fund's "Total Annual Operating Expenses"
for subsequent years (see Expense Table).
The table is supplemented as follows:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class I shares $123 $386 $669 $1,476
</TABLE>
3. DESCRIPTIONS OF SHARE CLASSES
The "Description of Share Classes" 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);
-2-
<PAGE> 232
--> 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).
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, on behalf of their clients (i) initially invest
at least $100,000 in class I shares of the fund or (ii) have, at the
time of purchase of class I shares, aggregate assets of at least $10
million invested in class I shares of the fund either alone or in
combination with investments in class I shares of other MFS Funds. MFD
may accept purchases that do not meet these dollar qualification
requirements if it believes, in its sole discretion, that these
requirements will be met within a reasonable period of time.
Additional investments may be made in any amount; 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.
-3-
<PAGE> 233
5. FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is intended to help you understand the fund's
financial performance. It is supplemented as follows:
FINANCIAL STATEMENTS - CLASS I SHARES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, PERIOD ENDED
1999 1998 AUGUST 31, 1997*
---- ---- ----------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.70 $ 13.08 $ 10.00
------- ------- -------
Income from investment operations# -
Net investment income (loss)ss. $ (0.11) $ (0.03) $ 1.01
Net realized and unrealized gain (loss) on investments
and foreign currency 4.27 (0.40) 2.07
------- ------- -------
Total from investment operations $ 4.16 $ (0.43) $ 3.08
------- ------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ (0.72) $ --
From net realized gain on investments and foreign
currency transactions (0.15) (1.23) --
------- ------- -------
Total distributions declared to shareholders $ (0.15) $ (1.95) $ --
------- ------- -------
Net asset value - end of period $ 14.71 $ 10.70 $ 13.08
------- ------- -------
Total return 39.06% (4.50)% 30.80%++
Ratios (to average net assets)/Supplemental datass.:
Expenses## 1.16% 1.18% 1.54%+
Net investment income (loss) (0.77)% (0.21)% 12.65%+
Portfolio turnover 104% 196% 887%
Net assets at end of period (000 omitted) $ 9,973 $ 3,321 $ 1,494
ss. Subject to reimbursement by the fund, the investment adviser voluntarily agreed to maintain the expenses of the fund, exclusive
of management fees, at not more than 0.25% of average daily net assets, effective November 1, 1997. Prior to November 1, 1997,
subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the fund at not more than 1.50%
of the fund's average daily net assets, and the investment adviser and shareholder servicing agent did not impose any of their
fees. In addition, to the extent actual expenses were over this limitation and the waivers had not been in place for the
periods indicated, the net investment income (loss) per share and the ratios would have been:
Net investment income $ (0.12) $ (0.03) $ 0.92
Ratios (to average net assets):
Expenses## 1.22% 1.28% 2.52%+
Net investment income (loss) (0.83)% (0.31)% 11.63%+
</TABLE>
* For the period from the commencement of the fund's investment operations,
January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund has an expense offset arrangement which reduces the fund's
custodian fees based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent. The fund's expenses are
calculated without reduction for this expense offset arrangement.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000.
-4-
<PAGE> 234
[MFS(R) NEW DISCOVERY FUND
JANUARY 1, 2000]
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------
This Prospectus describes the MFS(R) New Discovery Fund. The
fund's investment objective is capital appreciation.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 235
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary...................................... 1
II Expense Summary.......................................... 5
III Certain Investment Strategies and Risks.................. 7
IV Management of the Fund................................... 8
V Description of Share Classes............................. 9
VI How to Purchase, Exchange and Redeem Shares.............. 13
VII Investor Services and Programs........................... 17
VIII Other Information........................................ 19
IX Financial Highlights..................................... 21
Appendix A -- Investment Techniques and Practices........ A-1
</TABLE>
<PAGE> 236
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's investment objective is capital appreciation. The fund's
objective may be changed without shareholder approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its total
assets in equity securities of emerging growth companies. Equity securities
include common stocks and related securities, such as preferred stocks,
convertible securities and depositary receipts for those securities.
Emerging growth companies are companies which the fund's investment
adviser, Massachusetts Financial Services Company (referred to as MFS or
the adviser), believes offer superior prospects for growth and are either:
- early in their life cycle but which have the potential to become major
enterprises, or
- are major enterprises whose rates of earnings growth are expected to
accelerate because of special factors, such as rejuvenated management,
new products, changes in consumer demand, or basic changes in the
economic environment.
While emerging growth companies may be of any size, the fund will generally
focus on small cap emerging growth companies that are early in their life
cycle. Small cap companies are defined by MFS as those companies with
market capitalizations within the range of market capitalizations of
companies in the Russell 2000 Stock Index (currently $3.4 million to $5.12
billion). This index is a widely recognized, unmanaged index of small cap
common stock prices. MFS would expect these companies to have products,
technologies, management, markets and opportunities which will facilitate
earnings growth over time that is well above the growth rate of the overall
economy and the rate of inflation. The fund's investments in emerging
growth companies may include securities listed on a securities exchange or
traded in the over-the-counter markets.
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 (such as
an analysis of earnings, cash flows, competitive position and management's
abilities) performed by the fund's portfolio manager and MFS' large group
of equity research analysts.
The fund has engaged and may engage in active and frequent trading to
achieve its principal investment strategies.
-- PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
daily based on market conditions and other
1
<PAGE> 237
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 disappointing earnings results.
- Company Risk: Prices of securities react to the economic condition of
the company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
- Emerging Growth Companies Risk: Investments in emerging growth companies
may be subject to more abrupt or erratic market movements and may involve
greater risks than investments in other companies. Emerging growth
companies often:
- have limited product lines, markets and financial resources
- are dependent on management by one or a few key individuals
- have shares which suffer steeper than average price declines after
disappointing earnings reports and are more difficult to sell at
satisfactory prices
- Small Cap Companies Risk: Investments in small cap companies tend to
involve more risk and be more volatile than investments in larger
companies. Small cap companies may be more susceptible to market declines
because of their limited product lines, financial and management
resources, markets and distribution channels. Their shares may be more
difficult to sell at satisfactory prices during market declines.
- Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC listed companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in
smaller volume than exchange listed stocks. The values of these stocks
may be more volatile than exchange listed stocks, and the fund may
experience difficulty in purchasing or selling these securities at a fair
price.
- Active or Frequent Trading Risk: The fund has engaged and 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 as compared to a fund with less
active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could detract
from the fund's performance.
- 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.
2
<PAGE> 238
-- 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 changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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. The chart and related notes do not take into account any sales
charges (loads) 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.
[Performance Graph]
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<S> <C>
1997 39.50%
1998 19.49%
</TABLE>
The total return for the nine-month period ended September 30, 1999 was
2.69%. During the period shown in the bar chart, the highest quarterly
return was 24.95% (for the calendar quarter ended June 30, 1997) and the
lowest quarterly return was (19.12)% (for the calendar quarter ended
September 30, 1998).
3
<PAGE> 239
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compares to a broad measure of market performance and various other
market indicators and assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year Life*
<S> <C> <C>
Class A shares 12.62% 25.42%
Class B shares 14.75% 27.17%
Class C shares 17.92% 28.84%
Russell 2000 Total Return Index+** (2.55)% 9.20%
Standard & Poor's 500 Composite Index++*** 28.58% 30.95%
Average small cap fund+ (0.23)% 9.81%
</TABLE>
- ---------------
+ Source: Lipper Analytical Services, Inc.
++ Source: Standard & Poor's Micropal.
* Fund performance figures are for the period from the commencement of
the fund's investment operations on January 2, 1997, through December
31, 1998. Index and Lipper average returns are from January 1, 1997.
** The Russell 2000 Total Return Index is a broad based unmanaged index
comprised of 2,000 of the smallest U.S.-domiciled company common
stocks (on the basis of capitalization) that are traded in the United
States on the New York Stock Exchange, American Stock Exchange, and
National Association of Securities Dealers Automated Quotation System.
*** The Standard & Poor's 500 Composite Index is a broad based, unmanaged,
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange, and over-the-counter market.
Class A share performance takes into account the deduction of the 5.75%
maximum sales charge. Class B share 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 share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on January 2, 1997 with the
offering of class A shares and subsequently offered class B and C shares on
November 3, 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. This blended class B and class C share
performance has been adjusted to take into account the CDSC applicable to
class B and class C shares, rather than the initial sales charge (load)
applicable to class A shares. This blended performance has not been
adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B and C shares are higher
than those of class A shares, this blended class B and C share performance
is higher than the performance of class B and C shares would have been had
class B and C shares been offered for the entire period.
4
<PAGE> 240
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price)..... 5.75% 0.00% 0.00%
Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds, whichever is
less)............................. See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
...........................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees....................... 0.90% 0.90% 0.90%
Distribution and Service (12b-1)
Fees(2)............................... 0.35% 1.00% 1.00%
Other Expenses........................ 0.32% 0.32% 0.32%
----- ----- -----
Total Annual Fund Operating
Expenses.............................. 1.57% 2.22% 2.22%
Expense Reimbursement(3)............ (0.01)% (0.01)% (0.01)%
----- ----- -----
Net Expenses(4)..................... 1.56% 2.21% 2.21%
</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) MFS has contractually agreed to bear the fund's expenses subject to
reimbursement, such that "Other Expenses", after taking into account
the expense offset arrangement described below, do not exceed 0.25%.
These contractual fee arrangements will continue until at least January
1, 2001, absent an earlier modification approved by the board of
trustees which oversees the fund.
(4) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent. 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. Had these fee
reductions been taken into account, "Net Expenses" would be lower, and
would equal 1.55%, 2.20% and 2.20% for classes A, B and C,
respectively.
5
<PAGE> 241
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses" for
the first year, and the fund's "Total Annual Fund Operating Expenses" for
subsequent years (see Expense Table).
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $725 $1,041 $1,380 $2,334
Class B shares(1)
Assuming redemption at end of
period 624 993 1,389 2,390
Assuming no redemption 224 693 1,189 2,390
Class C shares
Assuming redemption at end of
period 324 693 1,189 2,554
Assuming no redemption 224 693 1,189 2,554
</TABLE>
- ---------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A expenses.
6
<PAGE> 242
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
------------------------------------------------------
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
--------------------------
In addition, 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's defensive
investment position may not be effective in protecting its value.
7
<PAGE> 243
IV 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 $122.8 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of
assets in equity securities, approximately $21.2 billion of assets in fixed
income funds and fixed income portfolios and approximately $8.9 billion of
assets in foreign securities. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the fund pays MFS an annual management fee computed and
paid monthly. For the fiscal year ended August 31, 1999, the fund paid MFS
an aggregate management fee equal to 0.90% per annum of the fund's average
daily net assets.
-- PORTFOLIO MANAGER
The fund's portfolio manager is Brian E. Stack, a Senior Vice President of
MFS. Mr. Stack has been employed as a portfolio manager by the adviser
since 1993 and has been the portfolio manager of the fund since the fund's
inception in January 1997.
-- 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.
-- 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.
8
<PAGE> 244
V DESCRIPTION OF SHARE CLASSES
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 purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), 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>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
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.
9
<PAGE> 245
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.
In addition, 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:
- 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 (referred to as 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;
- 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; and
- the plan has not redeemed its class B shares in the MFS funds in
order to purchase class A shares under this category.
- 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
10
<PAGE> 246
- 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.
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
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.
11
<PAGE> 247
-- 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
appreciation or 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, which means that the CDSC will be applied
against the lesser of your direct investment or the total cost of your
shares. The applicability of a CDSC will not be affected by exchanges or
transfers of registration, except as described in the SAI.
-- 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 (0.10% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25% service
fee), 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.
12
<PAGE> 248
VI 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 by having your financial
adviser process your purchase. The minimum initial investment is $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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC 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
13
<PAGE> 249
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 may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and policies are described
below under the captions "Right to Reject or Restrict Purchase and Exchange
Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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.
14
<PAGE> 250
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS funds may
consider trading done in multiple accounts under common ownership or
control.
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.
15
<PAGE> 251
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.
16
<PAGE> 252
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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
17
<PAGE> 253
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.
18
<PAGE> 254
VIII 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). The New York Stock Exchange is closed on most national
holidays and Good Friday. 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 any
realized net capital gains) to shareholders as dividends at least annually.
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on
your particular tax situation.
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 distributions you receive from the fund, whether you take the
distributions in
19
<PAGE> 255
cash or reinvest them in additional shares. Distributions designated as
capital gain dividends are taxable as long-term capital gains. Other
distributions 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.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if 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 will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to the fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding. Prospective investors should read the fund's
Account Application for additional information regarding backup withholding
of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
-- 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.
20
<PAGE> 256
IX FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
fund's financial performance since the fund's inception. 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. The fund's Annual
Report is available upon request by contacting MFSC (see back cover for
address and telephone number). These financial statements are incorporated
by reference into the SAI. The fund's independent auditors are Ernst &
Young LLP.
21
<PAGE> 257
CLASS A SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, PERIOD ENDED
------------------ AUGUST 31,
1999 1998 1997*
---------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data
(for a share outstanding throughout each
period):
Net asset value -- beginning of period $ 10.65 $ 13.07 $10.00
-------- ------- ------
Income from investment operations# -
Net investment income (loss) sec. $ (0.16) $ (0.11) $ 0.98
Net realized and unrealized gain (loss)
on investments and foreign currency 4.24 (0.36) 2.09
-------- ------- ------
Total from investment operations $ 4.08 $ (0.47) $ 3.07
-------- ------- ------
Less distributions declared to
shareholders --
From net investment income $ -- $ (0.72) $ --
From net realized gain on investments
and foreign currency transactions (0.14) (1.23) --
-------- ------- ------
Total distributions declared to
shareholders $ (0.14) $ (1.95) $ --
-------- ------- ------
Net asset value -- end of period $ 14.59 $ 10.65 $13.07
-------- ------- ------
Total return** 38.44% (4.88)% 30.70%++
Ratios (to average net
assets)/Supplemental data:sec.
Expenses## 1.51% 1.53% 1.54%+
Net investment income (loss) (1.13)% (0.82)% 12.41%+
Portfolio turnover 104% 196% 887%
Net assets at end of period (000
omitted) $248,710 $63,740 $ 536
</TABLE>
--------------
sec. Subject to reimbursement by the fund, the investment adviser agreed
to maintain the expenses of the fund, exclusive of management and
distribution and service fees, at not more than 0.25% of average
daily net assets, effective November 1, 1997. Prior to November 1,
1997, subject to reimbursement by the fund, the investment adviser
agreed to maintain the expenses of the fund at not more than 1.50%
of the fund's average daily net assets, and the investment adviser,
distributor and shareholder servicing agent did not impose any of
their fees. To the extent actual expenses were over this limitation
and the waivers had not been in place for the periods indicated, the
net investment income (loss) per share and the ratios would have
been:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss) $ (0.17) $ (0.12) $ 0.89
Ratios (to average net assets):
Expenses## 1.57% 1.63% 3.10%+
Net investment income (loss) (1.19)% (0.92)% 10.81%+
</TABLE>
* For the period from the commencement of the fund's investment
operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund has an expense offset arrangement which reduces the fund's
custodian fees based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund's expenses
are calculated without reduction for this expense offset arrangement.
** 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.
22
<PAGE> 258
CLASS B SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1999 1998*
--------------------------------------------------------------------------
<S> <C> <C>
Per share data
(for a share outstanding throughout each period):
Net asset value -- beginning of period $ 10.60 $ 11.80
-------- -------
Income from investment operations# --
Net investment loss sec. $ (0.24) $ (0.17)
Net realized and unrealized gain (loss) on
investments and foreign currency 4.21 (1.03)
-------- -------
Total from investment operations $ 3.97 $ (1.20)
-------- -------
Less distributions declared to shareholders --
From net investment income $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.11) --
-------- -------
Total distributions declared to shareholders $ (0.11) $ --
-------- -------
Net asset value -- end of period $ 14.46 $ 10.60
======== =======
Total return 37.56% (10.17)%++
Ratios (to average net assets)/Supplemental
data sec.:
Expenses## 2.16% 2.18%+
Net investment loss (1.76)% (1.49)%+
Portfolio turnover 104% 196%
Net assets at end of period (000 omitted) $174,488 $82,032
</TABLE>
--------------
sec. Subject to reimbursement by the fund, the investment adviser agreed
to maintain the expenses of the fund, exclusive of management and
distribution and service fees, at not more than 0.25% of average
daily net assets. To the extent actual expenses were over this
limitation, the net investment loss per share and the ratios would
have been:
<TABLE>
<S> <C> <C>
Net investment loss $(0.25) $(0.18)
Ratios (to average net assets):
Expenses## 2.22% 2.28%+
Net investment loss (1.82)% (1.59)%+
</TABLE>
* For the period from the inception of class B, November 3, 1997, through
August 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund has an expense offset arrangement which reduces the fund's
custodian fees based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund's expenses
are calculated without reduction for this expense offset arrangement.
23
<PAGE> 259
CLASS C SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1999 1998*
--------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period $ 10.61 $ 11.80
------- -------
Income from investment operations# --
Net investment loss sec. $ (0.24) $ (0.17)
Net realized and unrealized gain (loss) on
investments and foreign currency 4.21 (1.02)
------- -------
Total from investment operations $ 3.97 $ (1.19)
------- -------
Less distributions declared to shareholders --
From net investment income $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.11) --
------- -------
Total distributions declared to shareholders $ (0.11) $ --
------- -------
Net asset value -- end of period $ 14.47 $ 10.61
======= =======
Total return 37.53% (10.08)%++
Ratios (to average net assets)/Supplemental
data sec.:
Expenses## 2.16% 2.18%+
Net investment loss (1.78)% (1.51)%+
Portfolio turnover 104% 196%
Net assets at end of period (000 omitted) $74,493 $24,450
</TABLE>
--------------
sec. Subject to reimbursement by the fund, the investment adviser agreed
to maintain the expenses of the fund, exclusive of management and
distribution and service fees, at not more than 0.25% of average
daily net assets. To the extent actual expenses were over this
limitation, the net investment loss per share and the ratios would
have been:
<TABLE>
<S> <C> <C>
Net investment loss $ (0.25) $ (0.17)
Ratios (to average net assets):
Expenses## 2.22% 2.28%+
Net investment loss (1.84)% (1.61)%+
</TABLE>
* For the period from the inception of class C, November 3, 1997, through
August 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund has an expense offset arrangement which reduces the fund's
custodian fees based upon the amount of cash maintained by the fund
with its custodian and dividend disbursing agent. The fund's expenses
are calculated without reduction for this expense offset arrangement.
24
<PAGE> 260
APPENDIX A
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are also
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<CAPTION>
SYMBOLS X permitted -- not permitted
---------------------------------------------------------------------
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities X
Loans and Other Direct Indebtedness --
Lower Rated Bonds X
Municipal Bonds --
Speculative Bonds X
U.S. Government Securities X
Variable and Floating Rate
Obligations X
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds X
Equity Securities X
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts X
Dollar-Denominated Foreign Debt
Securities X
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities X
Inverse Floating Rate Obligations --
</TABLE>
A-1
<PAGE> 261
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
.........................................................
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds X
Closed-End Funds X
Lending of Portfolio Securities X
Leveraging Transactions
Bank Borrowings X
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies X
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options X
"Yield Curve" Options X
Repurchase Agreements X
Restricted Securities X
Short Sales X
Short Sales Against the Box X
Short Term Instruments X
Swaps and Related Derivative Instruments X
Temporary Borrowings X
Temporary Defensive Positions X
Warrants X
"When-issued" Securities X
</TABLE>
A-2
<PAGE> 262
MFS(R) NEW DISCOVERY 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 January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
MND-1 12/99 339M 97/297/397/897
<PAGE> 263
[New Discovery Fund LOGO]
January 1, 2000
<TABLE>
<S> <C> <C>
[MFS 75 YEARS LOGO] STATEMENT OF ADDITIONAL
INFORMATION
A SERIES OF MFS SERIES TRUST I
500 BOYLSTON STREET, BOSTON, MA 02116 This SAI is divided into two Parts -- Part I and
(617) 954-5000 Part II. Part I contains information that is
particular to the Fund, while Part II contains
This Statement of Additional Information, as information that generally applies to each of
amended or supplemented from time to time (the the funds in the MFS Family of Funds (the "MFS
"SAI"), sets forth information which may be of Funds"). Each Part of the SAI has a variety of
interest to investors but which is not appendices which can be found at the end of Part
necessarily included in the Fund's Prospectus I and Part II, respectively.
dated January 1, 2000. This SAI should be read THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED
in conjunction with the Prospectus. The Fund's FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY
financial statements are incorporated into this IF PRECEDED OR ACCOMPANIED BY A CURRENT
SAI by reference to the Fund's most recent PROSPECTUS.
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 of Part II
of this SAI for address and phone number).
</TABLE>
MND-13 12/99 600
<PAGE> 264
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 1
VIII Tax Considerations.......................................... 2
IX Independent Auditors and Financial Statements............... 2
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
</TABLE>
<PAGE> 265
I DEFINITIONS
"Fund" - MFS New Discovery Fund, a diversified series of the Trust.
"Trust" - MFS Series Trust I, a Massachusetts business Trust, organized on July
22, 1986. The Trust was known as "MFS Lifetime Managed Sectors Fund" prior to
August 1, 1993, and as "Lifetime Managed Sectors Trust" prior to August 3, 1992.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated January 1, 2000, as amended or
supplemented from time to time.
II 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.
III 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.
IV 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.
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 certain other MFS Funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS Funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
V 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.
VI 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.
VII 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 A to the Prospectus, and are more fully
described, together with their associated risks, in Part II of this SAI. The
following percentage limitations apply to these investment techniques and
practices:
- - Foreign Securities may be up to (but not including) 20% of net assets
- - Lower Rated Bonds may not exceed 10% of net assets
- - Short Sales -- value of underlying securities may not exceed 40% of net assets
- - Lending of Portfolio Securities may not exceed 30% of the Fund's net assets
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 the Fund or class, as applicable, or (ii) 67% or more of the
outstanding shares of the Trust or the Fund or class, as applicable, present at
a meeting at which holders of more than 50% of the outstanding shares of the
Trust or the Fund or class, as applicable, are represented in person or by
proxy). Except with respect to the Fund's policy on borrowing and investing in
illiquid securities, these investment restrictions and policies are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy. In the
event of a violation of nonfundamental investment policy (1), the Fund will
reduce the percentage of its assets invested in illiquid investments in due
course, taking into account the best interests of shareholders.
Part I -- 1
<PAGE> 266
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 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding Options, Options on
Futures Contracts, Options on Stock Indices, Options on Foreign Currency
and any other type of option, Futures Contracts, any other type of futures
contract, and Forward Contracts) in the ordinary course of its business.
The Fund reserves the freedom of action to hold and to sell real estate,
mineral leases, commodities or commodity contracts (including Options,
Options on Futures Contracts, Options on Stock Indices, Options on Foreign
Currency and any other type of option, Futures Contracts, any other type
of futures contract, and Forward Contracts) acquired as a result of the
ownership of securities;
(4) issue any senior securities except as permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). For purposes of this
restriction, collateral arrangements with respect to any type of option
(including Options on Futures Contracts, Options, Options on Stock Indices
and Options on Foreign Currencies), short sale, Forward Contracts, Futures
Contracts, any other type of futures contract, and collateral arrangements
with respect to initial and variation margin, are not deemed to be the
issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue
of debt securities, the lending of portfolio securities, or the investment
of the Fund's assets in repurchase agreements shall not be considered the
making of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities
of issuers whose principal business activities are in the same industry
(except obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements collateralized by
such obligations).
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 for the purpose of exercising control or management;
(3) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross assets.
For purposes of this restriction, collateral arrangements with respect to
any type of option (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any short
sale, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(4) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry.
(5) with respect to 75% of its total assets, (i) purchase more than 10% of the
outstanding voting securities of any one issuer; or (ii) purchase
securities of any issuer if as a result more than 5% of the Fund's total
assets would be invested in that issuer's securities. This limitation does
not apply to obligations of the U.S. Government or its agencies or
instrumentalities.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for the two years ended August 31, 1999,
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 -- 2
<PAGE> 267
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 and President (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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director. Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor. Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer. Address: 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: Boston,
Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
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);
Cambridge Nutraceuticals (professional nutritional products), Chief Executive
Officer. Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to June, 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director. Address:
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------------------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS 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.), an indirect subsidiary of Sun Life Assurance Company of Canada.
Part I -- A-1
<PAGE> 268
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 $1,250 per year
plus $225 per meeting and $225 per committee meeting attended, together with
such Trustee's out-of-pocket expenses. 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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT
BENEFIT TOTAL
TRUSTEE ACCRUED ESTIMATED TRUSTEE FEES
FEES AS PART OF CREDITED FROM FUND AND
FROM FUND YEARS OF FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $2,842 $32 5 $259,430
Marshall N. Cohan 3,292 49 5 143,259
Lawrence H. Cohn, M.D. 2,979 32 15 153,579
The Hon. Sir J. David Gibbons, KBE 2,842 32 5 130,059
Abby M. O'Neill 2,842 32 6 130,059
Walter E. Robb, III 3,429 49 5 171,154
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 3,517 49 17 157,714
Ward Smith 3,292 49 9 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ended August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- ---------------------------------------------
<S> <C> <C> <C> <C>
$2,558 $384 $639 $ 895 $1,279
2,820 423 705 987 1,410
3,082 462 771 1,079 1,541
3,344 502 836 1,171 1,672
3,607 541 902 1,262 1,803
3,869 580 967 1,354 1,934
</TABLE>
- -------------------------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-1
<PAGE> 269
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $3,152,095 $ 0 $45,869 $370,431 $ 0 $3,568,395
August 31, 1998 789,006 2,850 12,901 99,313 0 901,220
August 31, 1997 0 8,539 132* 0 1,498 132
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 270
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $2,110,839 $291,811 $1,819,028 $9,103 $380,334 $42,550
August 31, 1998 1,964,030 297,155 1,666,875 40 43,687 2,790
August 31, 1997 0 0 0 0 0 0
</TABLE>
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>
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
<S> <C>
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, 1999, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $ 470,499 $ 164,909 $305,590
Class B Shares 1,329,186 1,022,558 306,628
Class C Shares 420,266 32 420,234
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE> 271
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $807,476
August 31, 1998 355,403
August 31, 1997 22,001
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- ---------------------------------------------------------------
<S> <C>
None
</TABLE>
Part I -- E-1
<PAGE> 272
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 30, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares, not including 484,588
Class I shares of the Fund (which represent approximately 71% 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 September 30, 1999, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
............................................................................................
<S> <C>
MLPF&S for the Sole Benefit of its Customers 21.84% of Class A shares
Attn: Fund Administration 97SK3
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
............................................................................................
MLPF&S for the Sole Benefit of its Customers 8.02% of Class B shares
Attn: Fund Administration 97SK5
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
............................................................................................
MLPF&S for the Sole Benefit of its Customers 20.10% of Class C shares
Attn: Fund Administration 97SK6
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
............................................................................................
TRS MFS DEF Contribution Plan 58.44% of Class I shares
c/o Mark Leary 19th FL
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
............................................................................................
TRS MFS 401(k) Plan 12.59% of Class I shares
c/o Mark Leary
500 Boylston Street
19th Floor
Boston, MA 02116-3740
............................................................................................
First International Bank & Trust 27.07% of Class I shares
Do It & Co-Nominee
3001 25th Street S
Fargo, ND 58103-5055
............................................................................................
</TABLE>
Part I -- F-1
<PAGE> 273
PART I - APPENDIX G
PERFORMANCE INFORMATION
................................................................................
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
--------------- (INCLUDING (WITHOUT ANY Distribution
1 YEAR LIFE* WAIVERS) WAIVERS) RATE+
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (5.75%) 30.48% 19.94% N/A N/A N/A
Class A Shares, at net asset value 38.44% 22.64% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) 33.56% 21.32% N/A N/A N/A
Class B Shares, at net asset value 37.56% 22.14% N/A N/A N/A
Class C Shares, with CDSC (1% for
first year) 36.53% 22.17% N/A N/A N/A
Class C Shares, at net asset value 37.53% 22.17% N/A N/A N/A
Class I Shares, at net asset value 39.06% 23.07% N/A N/A N/A
</TABLE>
- -------------------------------
* From commencement of the Fund's investment operations on January 2, 1997.
+ Annualized, based upon the last distribution.
The Fund commenced investment operations on January 2, 1997, with the offering
of class A shares and class I shares, and subsequently offered class B shares
and class C shares on November 3, 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. This blended class B and class C share
performance has been adjusted to take into account the CDSC applicable to class
B and class C shares, rather than the initial sales charge (load) applicable to
class A shares. This blended performance has not been adjusted to take into
account differences in class specific operating expenses. Because operating
expenses of class B and C shares are higher than those of class A shares, this
blended class B and C share performance is higher than the performance of class
B and C shares would have been had class B and C shares been offered for the
entire period.
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
Part I -- G-1
<PAGE> 274
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE> 275
MFS(R) RESEARCH GROWTH AND INCOME FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2000. 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 "Description of Share Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's
performance over time. The table is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
1 YEAR LIFE*
------ -----
<S> <C> <C>
Class I shares 22.34% 26.18%
Standard & Poor's 500 Composite Index#+ 28.58% 28.23%
Average growth and income fund++ 15.80% 21.37%
</TABLE>
- -------------------------------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on January 2, 1996, through December 31, 1998.
Index and Lipper average returns are from January 1, 1996.
# The Standard & Poor's 500 Composite Index is a broad based unmanaged but
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
The fund commenced investment operations on January 2, 1996, with the offering
of class A shares and subsequently offered 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. This blended class I share
performance has been adjusted to take into account the fact that class I shares
have no initial sales charge (load). This blended performance has not been
adjusted to take into account differences in class specific operating expenses.
Because operating expenses of class I shares are lower than those of class A
shares, the blended class I share performance is lower than the performance of
class I shares would have been had class I shares been offered for the entire
period.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
<S> <C>
Management Fees........................................ 0.65%
Distribution and Service (12b-1) Fees.................. 0.00%
Other Expenses(1)...................................... 0.33%
----
Total Annual Fund Operating Expenses................... 0.98%
</TABLE>
- -----------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. The fund may enter into other
similar arrangements and directed
-1-
<PAGE> 276
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.
Had these fee reductions been taken into account, "Total Annual Fund
Operating Expenses" would be lower, and would equal 0.97% for class I.
EXAMPLE OF EXPENSES. The "Example of Expenses" table is intended to help
you compare the cost of investing in the fund with the cost of investing in
other mutual funds. The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
The table is supplemented as follows:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class I shares $100 $312 $542 $1,201
</TABLE>
3. DESCRIPTION OF SHARE CLASSES
The "Description of Share Classes" 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).
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, on behalf of their clients (i) initially invest
at least $100,000 in class I shares of the fund or (ii) have, at the
time of purchase of class I shares, aggregate assets of at least $10
million invested in class I shares of the fund either alone or in
combination with investments in class I shares of other MFS Funds. MFD
may accept purchases that do not meet these dollar qualification
requirements if it believes, in its sole discretion, that these
requirements will be met within a reasonable period of time.
Additional investments may be made in any amount; 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.
-2-
<PAGE> 277
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 intended to help you understand the fund's
financial performance. It is supplemented as follows:
FINANCIAL STATEMENTS - CLASS I SHARES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, PERIOD ENDED
1999 1998 AUGUST 31, 1997*
---- ---- ----------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 14.47 $ 14.16 $ 12.01
------- ------- -------
Income from investment operations# -
Net investment incomess. $ 0.09 $ 0.13 $ 0.08
Net realized and unrealized gain on investments and
foreign currency 4.05 0.78 2.11
------- ------- -------
Total from investment operations $ 4.14 $ 0.91 $ 2.19
------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.06) $ (0.03) $ (0.02)
From net realized gain on investments and foreign
currency transactions (0.62) (0.57) --
In excess of net investment income -- -- (0.02)
-- -- -------
Total distributions declared to shareholders $ (0.68) $ (0.60) $ (0.04)
------- ------- -------
Net asset value - end of period $ 17.93 $ 14.47 $ 14.16
------- ------- -------
Total return 28.95% 6.62% 19.01%++
Ratios (to average net assets)/Supplemental datass.:
Expenses## 0.98% 1.05% 1.19%+
Net investment income 0.56% 0.80% 0.87%+
Portfolio turnover 96% 101% 106%
Net assets at end of period (000 omitted) $ 742 $ 1,011 $ 825
</TABLE>
* For the period from the inception of Class I, January 2, 1997, through
August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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's expenses are calculated
without reduction for this expense offset arrangement.
ss. For the period ended August 31, 1997, subject to reimbursement by the Fund,
the investment adviser voluntarily agreed to maintain the expenses of the
fund, exclusive of management fees, at not more than 0.60% of average daily
net assets. To the extent actual expenses were over/under this limitation,
the net investment income per share and the ratios would have been:
<TABLE>
<CAPTION>
<S> <C>
Net investment income $ 0.08
Ratios (to average net assets):
Expenses## 1.22%+
Net investment income 0.83%+
</TABLE>
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000.
-3-
<PAGE> 278
[MFS
RESEARCH
GROWTH AND
INCOME FUND]
JANUARY 1, 2000
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------
This Prospectus describes the MFS(R) Research Growth and
Income Fund. The fund's investment objectives are long-term
growth of capital, current income and growth of income.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 279
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary...................................... 1
II Expense Summary.......................................... 6
III Certain Investment Strategies and Risks.................. 8
IV Management of the Fund................................... 9
V Description of Share Classes............................. 10
VI How to Purchase, Exchange and Redeem Shares.............. 14
VII Investor Services and Programs........................... 18
VIII Other Information........................................ 20
IX Financial Highlights..................................... 22
Appendix A -- Investment Techniques and Practices........ A-1
</TABLE>
<PAGE> 280
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's investment objectives are long-term growth of capital, current
income and growth of income. The fund's objectives may be changed without
shareholder approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its total
assets in common stocks and related securities, such as preferred stocks,
convertible securities and depositary receipts of dividend paying companies
with market capitalizations of at least $2 billion. The fund focuses on
dividend paying companies that the fund's investment adviser, Massachusetts
Financial Services Company (referred to as MFS or the adviser), believes
have sustainable growth prospects and attractive valuations based on
current and expected earnings or cash flow. While the fund invests at least
65% of its total assets in equity securities of companies with market
capitalizations in excess of $2 billion, the fund generally focuses on
companies with larger market capitalizations (market capitalizations in
excess of $5 billion). Equity securities may be listed on a securities
exchange or traded in the over-the-counter markets.
A committee of investment research analysts selects portfolio securities
for the fund. This committee includes investment analysts employed by MFS
and its affiliates. The committee allocates the fund's assets among various
industries. Individual analysts then select what they view as the
securities best suited to achieve the fund's investment objectives within
their assigned industry responsibility.
In pursuing this investment strategy, the fund may invest in foreign
securities (including emerging market securities) and may have exposure to
foreign currencies through its investment in these securities, its direct
holdings of foreign currencies or through its use of foreign currency
exchange contracts for the purchase or sale of a fixed quantity of foreign
currency at a future date.
-- PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
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 disappointing earnings results.
1
<PAGE> 281
- Company Risk: Prices of securities react to the economic condition of
the company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
- Large Cap Companies Risk: Large cap companies tend to go in and out of
favor based on market and economic conditions. Large cap companies tend
to be less volatile than companies with smaller market capitalizations.
In exchange for this potentially lower risk, the fund's value may not
rise as much as the value of funds that emphasize smaller cap companies.
- Growth Companies Risk: This is the risk that the prices of growth
company securities held by the fund 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 or disappointing growth company earnings results.
- Interest Rate Risk: Income producing equity securities may react like
fixed income securities to changes in interest rates. Thus, when interest
rates rise, the prices of income producing equity securities may fall.
Conversely, a decrease in interest rates may cause these securities to
increase in value.
- Foreign Markets Risk: Investing in foreign securities involves 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, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. 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. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in
2
<PAGE> 282
value or liquidity in the fund's foreign currency holdings. By
entering into forward foreign currency exchange contracts, the fund
may be required to forego the benefits of advantageous changes in
exchange rates and, in the case of forward contracts entered into
for the purpose of increasing return, the fund may sustain losses
which will reduce its gross income. Forward foreign currency
exchange contracts involve the risk that the party with which the
fund enters the contract may fail to perform its obligations to the
fund.
- Emerging Markets Risk: 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 significantly higher or lower
rates of return than developed markets, and significantly greater
risks, to investors.
- Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those incurred by transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in
smaller volume than exchange-listed stocks. The values of these stocks
may be more volatile than exchange-listed stocks, and the fund may
experience difficulty in purchasing or selling these securities at a fair
price.
- 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.
-- 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 changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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.
3
<PAGE> 283
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares. The chart and related notes do not take into account any sales
charges (loads) 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.
[Performance Graph]
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<S> <C>
1996 29.43
1997 26.20
1998 22.07
</TABLE>
The total return for the nine-month period ended September 30, 1999 was
(0.58)%. During the period shown in the bar chart, the highest quarterly
return was 19.21% (for the calendar quarter ended December 31, 1998) and
the lowest quarterly return was (12.40)% (for the calendar quarter ended
September 30, 1998).
4
<PAGE> 284
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compare to one or more broad measures of market performance and
assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year Life*
<S> <C> <C>
Class A shares 15.05% 23.43%
Class B shares 17.14% 24.47%
Class C shares 20.13% 25.05%
Standard & Poor's 500 Composite Index+# 28.58% 28.23%
Average growth and income fund++ 15.80% 21.37%
</TABLE>
- ---------------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on January 2, 1996, through December 31,
1998. Index and Lipper average returns are from January 1, 1996.
+ Source: Standard & Poor's Micropal
++ Source: Lipper Analytical Services, Inc.
# The Standard & Poor's 500 Composite Index is a broad based unmanaged but
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange, and over-the-counter market.
Class A share performance takes into account the deduction of the 5.75%
maximum sales charge. Class B share 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 share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on January 2, 1996 with the
offering of class A shares and subsequently offered class B and C 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. This blended class B and class C share
performance has been adjusted to take into account the CDSC applicable to
class B and class C shares, rather than the initial sales charge (load)
applicable to class A shares. This blended performance has not been
adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B and C shares are higher
than those of class A shares, this blended class B and class C share
performance is higher than the performance of class B and C shares would
have been had class B and C shares been offered for the entire period. If
you would like the fund's current yield, contact the MFS Service Center at
the toll free number set forth on the back cover page.
5
<PAGE> 285
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price)... 5.75% 0.00% 0.00%
Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds, whichever
is less)........................ See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
...........................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees.................
</TABLE>
<TABLE>
<S> <C> <C> <C>
Distribution and Service (12b-1)
Fees(2)......................... 0.35% 1.00% 1.00%
Other Expenses(3)............... 0.33% 0.33% 0.33%
Total Annual Fund Operating ----- ----- -----
Expenses........................ 1.33% 1.98% 1.98%
</TABLE>
0.65% 0.65% 0.65%
--------------
(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. Had these fee
reductions been taken into account, "Total Annual Fund Operating
Expenses" would be lower, and would equal 1.32%, 1.97% and 1.97% for
classes A, B and C, respectively.
6
<PAGE> 286
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $703 $972 $1,262 $2,084
Class B shares
Assuming redemption at end of
period 601 921 1,268 2,139
Assuming no redemption 201 621 1,068 2,139
Class C shares(1)
Assuming redemption at end of
period 301 621 1,068 2,306
Assuming no redemption 201 621 1,068 2,306
</TABLE>
--------------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A expenses.
7
<PAGE> 287
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
In addition, 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's defensive
investment position may not be effective in protecting its value.
-- ACTIVE OR FREQUENT TRADING
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 as compared to a fund with less
active trading policies, which would increase your tax liability. Frequent
trading also increases transaction costs, which could detract from the
fund's performance.
8
<PAGE> 288
IV 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 $122.8 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of
assets in equity securities, approximately $21.2 billion of assets in fixed
income funds and fixed income portfolios and approximately $8.9 billion of
assets in foreign securities. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the fund pays MFS an annual management fee computed and
paid monthly, in an amount equal to the sum of 0.65% of the first $500
million of the fund's average daily net assets and 0.55% of the amount in
excess of $500 million. For the fund's fiscal year ended August 31, 1999,
MFS received management fees equivalent to 0.65% of the fund's average
daily net assets.
-- PORTFOLIO MANAGER
The fund is managed by a committee of investment research analysts under
the general supervision of Alec C. Murray, the Associate Director of Equity
Research and a Vice President of MFS. Mr. Murray has been employed as a
portfolio manager by the adviser since 1993.
-- 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.
-- 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.
9
<PAGE> 289
V DESCRIPTION OF SHARE CLASSES
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 purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), 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>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
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.
10
<PAGE> 290
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.
In addition, 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:
- 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 (referred to as 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;
- 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; and
- the plan has not redeemed its class B shares in the MFS funds in
order to purchase class A shares under this category.
- 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
11
<PAGE> 291
- 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.
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
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.
12
<PAGE> 292
-- 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
appreciation or 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, which means that the CDSC will be applied
against the lesser of your direct investment or the total cost of your
shares. The applicability of a CDSC will not be affected by exchanges or
transfers of registration, except as described in the SAI.
-- 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 (0.10% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25% service
fee), 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.
13
<PAGE> 293
VI 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 by having your financial
adviser process your purchase. The minimum initial investment is $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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC 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
14
<PAGE> 294
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 may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and policies are described
below under the captions "Right to Reject or Restrict Purchase and Exchange
Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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.
15
<PAGE> 295
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS funds may
consider trading done in multiple accounts under common ownership or
control.
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.
16
<PAGE> 296
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.
17
<PAGE> 297
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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
18
<PAGE> 298
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.
19
<PAGE> 299
VIII OTHER INFORMATION GRAPHIC
-- 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). The New York Stock Exchange is closed on most national
holidays and Good Friday. 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 (excluding any
realized net capital gains) to shareholders as dividends at least
quarterly. Any realized net capital gains are distributed at least
annually.
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on
your particular tax situation.
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.
20
<PAGE> 300
You will normally have to pay federal income taxes, and any state or local
taxes, on the distributions you receive from the fund, whether you take the
distributions in cash or reinvest them in additional shares. Distributions
designated as capital gain dividends are taxable as long-term capital
gains. Other distributions 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.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if 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 will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to the fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding. Prospective investors should read the fund's
Account Application for additional information regarding backup withholding
of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
-- 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.
21
<PAGE> 301
IX FINANCIAL HIGHLIGHTS GRAPHIC
The financial highlights table is intended to help you understand the
fund's financial performance since the fund's inception. 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. The fund's Annual
Report is available upon request by contacting MFSC (see back cover for
address and telephone number). These financial statements are incorporated
by reference into the SAI. The fund's independent auditors are Ernst &
Young LLP.
22
<PAGE> 302
CLASS A SHARES
...........................................................................
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED AUGUST 31, ENDED
--------------------------- AUGUST 31,
1999 1998 1997 1996*
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data
(for a share outstanding throughout
each period):
Net asset value -- beginning of
period $ 14.42 $ 14.12 $ 11.13 $10.00
------- ------- ------- ------
Income from investment operations# --
Net investment incomesec. $ 0.05 $ 0.09 $ 0.07 $ 0.05
Net realized and unrealized gain on
investments and foreign currency 4.03 0.78 3.02 1.08
------- ------- ------- ------
Total from investment
operations $ 4.08 $ 0.87 $ 3.09 $ 1.13
------- ------- ------- ------
Less distributions declared to
shareholders --
From net investment income $ (0.01) $ (0.03) $ (0.06) $ --
From net realized gain on
investments and foreign currency
transactions (0.62) (0.54) (0.04) --
------- ------- ------- ------
Total distributions declared to
shareholders $ (0.63) $ (0.57) $ (0.10) $ --
------- ------- ------- ------
Net asset value -- end of period $ 17.87 $ 14.42 $ 14.12 $11.13
======= ======= ======= ======
Total return++ 28.64% 6.33% 36.22% 11.30%++
Ratios (to average net assets)/
Supplemental datasec.:
Expenses## 1.23% 1.29% 1.51% 1.55%+
Net investment income 0.30% 0.56% 0.56% 0.65%+
Portfolio turnover 96% 101% 106% 58%
Net assets at end of period (000
omitted) $76,635 $52,238 $33,567 $ 492
</TABLE>
--------------
sec. The distributor voluntarily waived a portion of its distribution fee
for all periods indicated below. For the year ended August 31, 1997,
and for the period ended August 31, 1996, subject to reimbursement
by the fund, the investment adviser agreed to maintain the expenses
of the fund, exclusive of management and distribution and service
fees, at not more than 0.60% of average daily net assets. To the
extent actual expenses were over/under this limitation and the
waiver had not been in place, the net investment income (loss) per
share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) $0.03 $0.07 $0.07 $(0.13)
Ratios (to average net assets):
Expenses## 1.33% 1.39% 1.55% 4.58%+
Net investment income (loss) 0.20% 0.46% 0.51% (1.86)%+
</TABLE>
--------------
* For the period from the commencement of the fund's investment
operations, January 2, 1996, through August 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund 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's expenses are
calculated without reduction for this expense offset arrangement.
++ 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.
23
<PAGE> 303
CLASS B SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
AUGUST 31, ENDED
------------------- AUGUST 31,
1999 1998 1997*
------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data
(for a share outstanding throughout each
period):
Net asset value -- beginning of period $ 14.40 $ 14.11 $ 12.01
-------- ------- -------
Income from investment operations# --
Net investment losssec. $ (0.08) $ (0.03) $ (0.02)
Net realized and unrealized gain on
investments and foreign currency 4.02 0.80 2.13
-------- ------- -------
Total from investment operations $ 3.94 $ 0.77 $ 2.11
-------- ------- -------
Less distributions declared to
shareholders --
From net investment income $ -- $ (0.00)+++ $ (0.01)
From net realized gain on investments
and foreign currency transactions (0.62) (0.48) --
In excess of net investment income -- -- (0.00)+++
-------- ------- -------
Total distributions declared to
shareholders $ (0.62) $ (0.48) $ (0.01)
-------- ------- -------
Net asset value -- end of period $ 17.72 $ 14.40 $ 14.11
======== ======= =======
Total return 27.74% 5.54% 17.56%++
Ratios (to average net assets)/
Supplemental datasec.:
Expenses## 1.98% 2.03% 2.26%+
Net investment loss (0.45)% (0.19)% (0.22)%+
Portfolio turnover 96% 101% 106%
Net assets at end of period (000 omitted) $112,000 $76,032 $43,069
</TABLE>
--------------
sec. For the period ended August 31, 1997, subject to reimbursement by
the fund, the investment adviser agreed to maintain the expenses of
the fund, exclusive of management and distribution and service fees,
at not more than 0.60% of average daily net assets. To the extent
actual expenses were over/under this limitation, the net investment
loss per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment loss $(0.02)
Ratios (to average net assets):
Expenses## 2.30%+
Net investment loss (0.27)%+
</TABLE>
--------------
* For the period from the inception of class B, January 2, 1997, through
August 31, 1997.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## 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's expenses are
calculated without reduction for this expense offset arrangement.
24
<PAGE> 304
CLASS C SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
AUGUST 31, ENDED
------------------ AUGUST 31,
1999 1998 1997*
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data
(for a share outstanding throughout each
period):
Net asset value -- beginning of period $ 14.36 $ 14.08 $ 12.00
------- ------- -------
Income from investment operations# --
Net investment losssec. $ (0.08) $ (0.03) $ (0.02)
Net realized and unrealized gain on
investments and foreign currency 4.01 0.80 2.11
------- ------- -------
Total from investment operations $ 3.93 $ 0.77 $ 2.09
------- ------- -------
Less distributions declared to
shareholders --
From net investment income $ -- $ (0.00)+++ $ (0.01)
From net realized gain on investments and
foreign currency transactions (0.62) (0.49) --
In excess of net investment income -- -- (0.00)+++
------- ------- -------
Total distributions declared to
shareholders $ (0.62) $ (0.49) $ (0.01)
------- ------- -------
Net asset value -- end of period $ 17.67 $ 14.36 $ 14.08
======= ======= =======
Total return 27.66% 5.59% 17.41%++
Ratios (to average net assets)/
Supplemental datasec.:
Expenses## 1.98% 2.03% 2.26%+
Net investment loss (0.46)% (0.19)% (0.21)%+
Portfolio turnover 96% 101% 106%
Net assets at end of period (000 omitted) $22,074 $13,199 $ 7,433
</TABLE>
--------------
sec. For the period ended August 31, 1997, subject to reimbursement by
the fund, the investment adviser agreed to maintain the expenses of
the fund, exclusive of management and distribution and service fees,
at not more than 0.60% of average daily net assets. To the extent
actual expenses were over/under this limitation, the net investment
loss per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment loss $(0.02)
Ratios (to average net assets):
Expenses## 2.30%+
Net investment loss (0.26)%+
</TABLE>
--------------
* For the period from the inception of class C, January 2, 1997, through
August 31, 1997.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## 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's expenses are
calculated without reduction for this expense offset arrangement.
25
<PAGE> 305
[Appendix A Graphic]
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are also
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<S> <C> <C>
SYMBOLS X permitted -- not permitted
-------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities X
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities X
Variable and Floating Rate
Obligations X
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds --
Equity Securities X
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts X
Dollar-Denominated Foreign Debt
Securities X
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities X
Inverse Floating Rate Obligations --
</TABLE>
A-1
<PAGE> 306
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
................................................................................
<TABLE>
<S> <C> <C>
Investment in Other Investment Companies
Open-End Funds X
Closed-End Funds X
Lending of Portfolio Securities X
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies X
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options X
"Yield Curve" Options X
Repurchase Agreements X
Restricted Securities X
Short Sales --
Short Sales Against the Box --
Short Term Instruments X
Swaps and Related Derivative Instruments X
Temporary Borrowings X
Temporary Defensive Positions X
Warrants X
"When-issued" Securities X
</TABLE>
A-2
<PAGE> 307
MFS(R) RESEARCH GROWTH AND INCOME 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 January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
MRG-1 12/99 127M 91/291/391/891
<PAGE> 308
[MFS(R) RESEARCH GROWTH AND INCOME FUND LOGO]
JANUARY 1, 2000
<TABLE>
<S> <C>
[MFS 75 YEARS LOGO] STATEMENT OF ADDITIONAL
INFORMATION
A SERIES OF MFS SERIES TRUST I
500 BOYLSTON STREET, BOSTON, MA 02116
(617) 954-5000
This Statement of Additional Information, as This SAI is divided into two Parts -- Part I and
amended or supplemented from time to time (the Part II. Part I contains information that is
"SAI"), sets forth information which may be of particular to the Fund, while Part II contains
interest to investors but which is not information that generally applies to each of
necessarily included in the Fund's Prospectus the funds in the MFS Family of Funds (the "MFS
dated January 1, 2000. This SAI should be read Funds"). Each Part of the SAI has a variety of
in conjunction with the Prospectus. The Fund's appendices which can be found at the end of Part
financial statements are incorporated into this I and Part II, respectively.
SAI by reference to the Fund's most recent
Annual Report to shareholders. A copy of the THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED
Annual Report accompanies this SAI. You may FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY
obtain a copy of the Fund's Prospectus and IF PRECEDED OR ACCOMPANIED BY A CURRENT
Annual Report without charge by contacting MFS PROSPECTUS.
Service Center, Inc. (see back cover of Part II
of this SAI for address and phone number).
</TABLE>
MRG-13 12/99 600
<PAGE> 309
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 1
VIII Tax Considerations.......................................... 2
IX Independent Auditors and Financial Statements............... 2
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
</TABLE>
<PAGE> 310
I DEFINITIONS
"Fund" - MFS Research Growth and Income Fund, a diversified series of the Trust.
"Trust" - MFS Series Trust I, a Massachusetts business Trust, organized on July
22, 1986. The Trust was known as "MFS Lifetime Managed Sectors Fund" prior to
August 1, 1993, and as "Lifetime Managed Sectors Trust" prior to August 3, 1992.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated January 1, 2000, as amended or
supplemented from time to time.
II 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.
III 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.
IV 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.
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 certain other MFS Funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS Funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
V 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.
VI 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.
VII 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 A to the Prospectus, and are more fully
described, together with their associated risks, in Part II of this SAI. The
following percentage limitations apply to these investment techniques and
practices:
- - Foreign Securities may be up to (but not including) 20% of net assets.
- - Lending of Portfolio Securities may not exceed 30% of the Fund's net assets
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 the Fund or class, as applicable, or (ii) 67% or more of the
outstanding shares of the Trust or the Fund or class, as applicable, present at
a meeting at which holders of more than 50% of the outstanding shares of the
Trust or the Fund or class, as applicable, are represented in person or by
proxy). Except with respect to the Fund's policy on borrowing and investing in
illiquid securities, these investment restrictions and policies are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy. In the
event of a violation of nonfundamental investment policy (1),
Part I -- 1
<PAGE> 311
the Fund will reduce the percentage of its assets invested in illiquid
investments in due course, taking into account the best interests of
shareholders.
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding Options, Options on
Futures Contracts, Options on Stock Indices, Options on Foreign Currency
and any other type of option, Futures Contracts, any other type of futures
contract, and Forward Contracts) in the ordinary course of its business.
The Fund reserves the freedom of action to hold and to sell real estate,
mineral leases, commodities or commodity contracts (including Options,
Options on Futures Contracts, Options on Stock Indices, Options on Foreign
Currency and any other type of option, Futures Contracts, any other type
of futures contract, and Forward Contracts) acquired as a result of the
ownership of securities;
(4) issue any senior securities except as permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). For purposes of this
restriction, collateral arrangements with respect to any type of option
(including Options on Futures Contracts, Options, Options on Stock Indices
and Options on Foreign Currencies), short sale, Forward Contracts, Futures
Contracts, any other type of futures contract, and collateral arrangements
with respect to initial and variation margin, are not deemed to be the
issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue
of debt securities, the lending of portfolio securities, or the investment
of the Fund's assets in repurchase agreements shall not be considered the
making of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities
of issuers whose principal business activities are in the same industry
(except obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements collateralized by
such obligations).
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 for the purpose of exercising control or management;
(3) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross assets.
For purposes of this restriction, collateral arrangements with respect to
any type of option, (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any short
sale, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(4) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry; or
(5) with respect to 75% of its total assets, (i) purchase more than 10% of the
outstanding voting securities of any one issuer; or (ii) purchase
securities of any issuer if as a result more than 5% of the Fund's total
assets would be invested in that issuer's securities. This limitation does
not apply to obligations of the U.S. Government or its agencies or
instrumentalities.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for the two years ended August 31, 1999,
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 -- 2
<PAGE> 312
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 and President (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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director. Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor. Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer. Address: 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: Boston,
Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
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);
Cambridge Nutraceuticals (professional nutritional products), Chief Executive
Officer. Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to June, 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director. Address:
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------------------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS 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.), an indirect subsidiary of Sun Life Assurance Company of Canada.
Part I -- A-1
<PAGE> 313
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 $1,250 per year
plus $225 per meeting and $225 per committee meeting attended, together with
such Trustee's out-of-pocket expenses. 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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT TOTAL
TRUSTEE BENEFIT ESTIMATED TRUSTEE FEES
FEES ACCRUED CREDITED FROM FUND AND
FROM AS PART OF YEARS OF FUND
TRUSTEE FUND(1) FUND EXPENSE(1) SERVICE(2) COMPLEX(3)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,500 $306 6 $259,430
Marshall N. Cohan 3,725 351 6 143,259
Lawrence H. Cohn, M.D. 3,653 317 16 153,579
The Hon. Sir J. David Gibbons, KBE 3,500 306 6 130,059
Abby M. O'Neill 3,500 306 7 130,059
Walter E. Robb, III 3,878 377 6 171,154
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 3,950 386 18 157,714
Ward Smith 3,725 356 10 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ended August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- --------------------------------------------------
<S> <C> <C> <C> <C>
$3,150 $473 $ 788 $1,103 $1,575
3,389 508 847 1,186 1,695
3,628 544 907 1,270 1,814
3,867 580 967 1,353 1,934
4,106 616 1,027 1,437 2,053
4,345 652 1,086 1,521 2,173
</TABLE>
- -------------------------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-1
<PAGE> 314
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $1,252,383 $0 $24,553 $205,404 $0 $1,482,340
August 31, 1998 825,565 0 18,225 149,487 0 993,277
August 31, 1997 210,333 0 0* 37,101 0 247,434
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 315
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $ 532,615 $ 79,429 $ 453,186 $1,433 $182,176 $4,517
August 31, 1998 776,167 119,900 656,267 50 82,488 5,881
August 31, 1997 1,131,865 61,977 1,069,888 0 12,565 1,795
</TABLE>
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>
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
<S> <C>
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, 1999, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $ 175,949 $ 3,244 $172,705
Class B Shares 1,017,225 763,477 253,748
Class C Shares 196,908 175 196,733
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE> 316
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $408,619
August 31, 1998 $338,526
August 31, 1997 $142,865
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- ---------------------------------------------------------------
<S> <C>
Citi Group $2,844,000
Bank Boston Corp. 2,182,562
Bank of America 1,016,400
</TABLE>
Part I -- E-1
<PAGE> 317
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 30, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares, not including 41,359 Class
I shares of the Fund (which represent approximately 99% 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 September 30, 1999, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
..........................................................................................
<S> <C>
MLPF&S for the Sole Benefit of its Customers 8.97% of Class B shares
Attn: Fund Administration 97MP2
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
..........................................................................................
MLPF&S for the Sole Benefit of its Customers 17.85% of Class C shares
Attn: Fund Administration 97MP4
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
..........................................................................................
TRS MFS DEF Contribution Plan 99.98% 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> 318
PART I - APPENDIX G
PERFORMANCE INFORMATION
................................................................................
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
--------------- (INCLUDING (WITHOUT ANY Distribution
1 YEAR LIFE* WAIVERS) WAIVERS) RATE+
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (5.75%) 21.25% 20.08% N/A N/A N/A
Class A Shares, at net asset value 28.64% 22.03% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) 23.74% 20.76% N/A N/A N/A
Class B Shares, at net asset value 27.74% 21.26% N/A N/A N/A
Class C Shares, with CDSC (1% for
first year) 26.66% 21.21% N/A N/A N/A
Class C Shares, at net asset value 27.66% 21.21% N/A N/A N/A
Class I Shares, at net asset value 28.95% 22.32% N/A N/A N/A
</TABLE>
- -------------------------------
* From commencement of the Fund's investment operations on January 2, 1996.
+ Annualized, based upon the last distribution.
The Fund commenced investment operations on January 2, 1996, with the offering
of class A shares and subsequently offered class B shares, class C shares and
class I shares on January 2, 1997. Class B, C and I share performance include
the performance of the Fund's class A shares for periods prior to the offering
of class B, C and I shares. This blended class B and class C share performance
has been adjusted to take into account the CDSC applicable to class B and class
C shares, rather than the initial sales charge (load) applicable to class A
shares. The blended class I share performance has been adjusted to take into
account the fact that class I shares have no initial sales charge (load). This
blended performance has not been adjusted to take into account differences in
class specific operating expenses. Because operating expenses of class B and C
shares are higher than those of class A shares, the blended class B and C share
performance is higher than the performance of class B and C shares would have
been had class B and C shares been offered for the entire period. Conversely,
because operating expenses of class I shares are lower than those of class A
shares, the blended class I share performance is lower than the performance of
class I shares would have been had class I shares been offered for the entire
period.
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
Part I -- G-1
<PAGE> 319
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE> 320
MFS(R) EQUITY INCOME FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2000. 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 "Description of Share Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's performance
over time. The table is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
1 YEAR LIFE*
------ -----
<S> <C> <C>
Class I shares 17.66% 25.71%
Standard & Poor's 500 Composite Index#+ 28.58% 28.23%
Average equity income fund++ 11.90% 19.07%
</TABLE>
- ------------------------------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on January 2, 1996, through December 31, 1998.
Index and Lipper average returns are from January 1, 1996.
# The Standard & Poor's 500 Composite Index is a broad based unmanaged but
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange, and over-the-counter market.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
The fund commenced investment operations on January 2, 1996, with the offering
of class A shares and subsequently offered 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. This blended class I share
performance has been adjusted to take into account the fact that class I shares
have no initial sales charge (load). This blended performance has not been
adjusted to take into account differences in class specific operating expenses.
Because operating expenses of class I shares are lower than those of class A
shares, the blended class I share performance is lower than the performance of
class I shares would have been had class I shares been offered for the entire
period.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
<S> <C>
Management Fees.................................... 0.60%
Distribution and Service (12b-1) Fees.............. 0.00%
Other Expenses(1).................................. 0.41%
----
Total Annual Fund Operating Expenses............... 1.01%
</TABLE>
- -----------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. 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. Had these fee reductions been taken into
account, "Total Annual Fund Operating Expenses" would be lower, and would
equal 1.00% for class I.
-1-
<PAGE> 321
EXAMPLE OF EXPENSES. The "Example of Expenses" table is intended to help
you compare the cost of investing in the fund with the cost of investing in
other mutual funds. The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods.
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
The table is supplemented as follows:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class I shares $103 $322 $558 $1,236
</TABLE>
3. DESCRIPTION OF SHARE CLASSES
The "Description of Share Classes" 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).
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, on behalf of their clients (i) initially invest
at least $100,000 in class I shares of the fund or (ii) have, at the
time of purchase of class I shares, aggregate assets of at least $10
million invested in class I shares of the fund either alone or in
combination with investments in class I shares of other MFS Funds. MFD
may accept purchases that do not meet these dollar qualification
requirements if it believes, in its sole discretion, that these
requirements will be met within a reasonable period of time.
Additional investments may be made in any amount; 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
-2-
<PAGE> 322
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 intended to help you understand the fund's
financial performance. It is supplemented as follows:
FINANCIAL HIGHLIGHTS - CLASS I SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
EQUITY INCOME FUND AUGUST 31, 1999 AUGUST 31, 1998 AUGUST 31, 1997*
--------------- --------------- ----------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 14.22 $ 14.81 $ 12.20
------- ------- -------
Income from investment operations# -
Net investment incomess. $ 0.31 $ 0.24 $ 0.15
Net realized and unrealized gain on investments and
foreign currency### 3.20 1.09 2.46
------- ------- -------
Total from investment operations $ 3.51 $ 1.33 $ 2.61
------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.27) $ (0.21) $ --
From net realized gain on investments and foreign
currency transactions (0.22) (1.71) --
------- ------- -------
Total distributions declared to shareholders $ (0.49) $ (1.92) $ --
------- ------- -------
Net asset value - end of period $ 17.24 $ 14.22 $ 14.81
------- ------- -------
Total return 24.97% 9.83% 21.39%++
Ratios (to average net assets)/Supplemental datass.:
Expenses## 1.01% 1.19% 1.54%+
Net investment income 1.85% 1.57% 1.51%+
Portfolio turnover 97% 89% 118%
Net assets at end of period (000 omitted) $ 3,413 $ 999 $ 964
ss. Effective November 1, 1997, subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the
fund, exclusive of management, distribution and service fees, at not more that 0.40% of average daily net assets. Prior to
November 1, 1997, subject to reimbursement by the fund, the investment adviser agreed to maintain the expenses of the fund,
exclusive of management, distribution, and service fees, at not more than 1.50% of average daily net assets. To the extent
actual expenses were over these limitations, the net investment income per share and the ratios would have been:
Net investment income $ 0.31 $ 0.12 $ 0.03
Ratios (to average net assets):
Expenses## 1.01% 1.93% 2.67%+
Net investment income 0.85% 0.82% 0.35%+
</TABLE>
* For the period from the inception of class I, January 2, 1997, through
August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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's expenses are calculated
without reduction for this expense offset arrangement.
### The per share amount is not in accordance with the net realized and
unrealized gain (loss) for the year ended August 31, 1998 because of the
timing of sales of fund shares and the amount of per share realized and
unrealized gains and losses at such time.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000.
-3-
<PAGE> 323
[MFS EQUITY
INCOME FUND
JANUARY 1, 2000]
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------
This Prospectus describes the MFS(R) Equity Income Fund. The
fund's primary investment objective is to provide reasonable
income by investing mainly in income producing securities,
and its secondary investment objective is capital
appreciation.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 324
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary...................................... 1
II Expense Summary.......................................... 5
III Certain Investment Strategies and Risks.................. 7
IV Management of the Fund................................... 8
V Description of Share Classes............................. 9
VI How to Purchase, Exchange and Redeem Shares.............. 13
VII Investor Services and Programs........................... 17
VIII Other Information........................................ 19
IX Financial Highlights..................................... 22
Appendix A -- Investment Techniques and Practices........ A-1
</TABLE>
<PAGE> 325
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's primary investment objective is to provide reasonable income by
investing mainly in income producing securities, and its secondary
investment objective is capital appreciation. The fund's objectives may be
changed without shareholder approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its total
assets in income producing equity securities. The fund seeks to achieve a
gross yield that exceeds that of the S&P 500. Equity securities include
common stocks and related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities. While the fund may
invest in companies of any size, the fund generally focuses on companies
with large market capitalizations that the fund's investment adviser,
Massachusetts Financial Services Company (referred to as MFS or the
adviser), believes have sustainable growth prospects and attractive
valuations based on current and expected earnings or cash flow. Equity
securities may be listed on a securities exchange or traded in the
over-the-counter markets.
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 (such as
an analysis of earnings, cash flows, competitive position and management's
abilities) performed by the fund's portfolio manager and MFS' large group
of equity research analysts.
The fund may invest in foreign securities through which it may have
exposure to foreign currencies.
-- PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
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 disappointing earnings results.
- Company Risk: Prices of securities react to the economic condition of
the company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
1
<PAGE> 326
- Large Cap Companies Risk: Large cap companies tend to go in and out of
favor based on market and economic conditions. Large cap companies tend
to be less volatile than companies with smaller market capitalizations.
In exchange for this potentially lower risk, the fund's value may not
rise as much as the value of funds that emphasize smaller cap companies.
- Interest Rate Risk: Income producing equity securities may react like
fixed income securities to changes in interest rates. Thus, when interest
rates rise, the prices of income producing equity securities may fall.
Conversely, a decrease in interest rates may cause these securities to
increase in value.
- Foreign Markets Risk: Investing in foreign securities involves 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, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. 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. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in the fund's foreign currency
holdings. By entering into forward foreign currency exchange
contracts, the fund may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of forward
contracts entered into for the purpose of increasing return, the
fund may sustain losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk that the party
with which the fund enters the contract may fail to perform its
obligations to the fund.
- 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.
2
<PAGE> 327
-- 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 changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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. The chart and related notes do not take into account any sales
charges (loads) 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.
[Performance Graph]
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<S> <C>
1996 26.01%
1997 33.93%
1998 17.09%
</TABLE>
The total return for the nine-month period ended September 30, 1999 was
1.90%. During the period shown in the bar chart, the highest quarterly
return was 13.74% (for the calendar quarter ended June 30, 1997) and the
lowest quarterly return was (5.69)% (for the calendar quarter ended
September 30, 1998).
3
<PAGE> 328
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compare to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year Life*
<S> <C> <C>
Class A shares 10.36% 23.06%
Class B shares 12.41% 16.02%
Class C shares 15.35% 19.23%
Standard & Poor's 500 Composite Index+# 28.58% 28.23%
Average equity income fund++ 11.90% 19.07%
</TABLE>
- ---------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on January 2, 1996, through December 31,
1998. Index and Lipper average returns are from January 1, 1996.
+ Source: Standard & Poor's Micropal
++ Source: Lipper Analytical Services, Inc.
# The Standard & Poor's 500 Composite Index is a broad based unmanaged but
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange, and over-the-counter market.
Class A share performance takes into account the deduction of the 5.75%
maximum sales charge. Class B share 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 share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on January 2, 1996 with the
offering of class A shares and subsequently offered class B shares on
November 4, 1997 and C shares on November 5, 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. This blended
class B and class C share performance has been adjusted to take into
account the CDSC applicable to class B and class C shares, rather than the
initial sales charge (load) applicable to class A shares. This blended
performance has not been adjusted to take into account differences in class
specific operating expenses. Because operating expenses of class B and C
shares are higher than those of class A shares, this blended class B and C
share performance is higher than the performance of class B and C shares
would have been had class B and C shares been offered for the entire
period. If you would like the fund's current yield, contact the MFS Service
Center at the toll free number set forth on the back cover page.
4
<PAGE> 329
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price)... 5.75% 0.00% 0.00%
Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds, whichever
is less)........................ See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
...........................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees........................... 0.60% 0.60% 0.60%
Distribution and Service (12b-1) Fees(2).. 0.35% 1.00% 1.00%
Other Expenses(3)......................... 0.41% 0.41% 0.41%
---- ---- ----
Total Annual Fund Operating Expenses...... 1.36% 2.01% 2.01%
</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. Had these fee
reductions been taken into account, "Total Annual Fund Operating
Expenses" would be lower, and would equal 1.35%, 2.00% and 2.00% for
classes A, B and C, respectively.
5
<PAGE> 330
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $706 $981 $1,277 $2,116
Class B shares(1)
Assuming redemption at end of
period 604 931 1,283 2,170
Assuming no redemption 204 631 1,083 2,170
Class C shares
Assuming redemption at end of
period 304 631 1,083 2,338
Assuming no redemption 204 631 1,083 2,338
</TABLE>
--------------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A expenses.
6
<PAGE> 331
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
In addition, 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's defensive
investment position may not be effective in protecting its value.
-- ACTIVE OR FREQUENT TRADING
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 as compared to a fund with less
active trading policies, which would increase your tax liability. Frequent
trading also increases transaction costs, which could detract from the
fund's performance.
7
<PAGE> 332
IV 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 $122.8 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of
assets in equity securities, approximately $21.2 billion of assets in fixed
income funds and fixed income portfolios and approximately $8.9 billion of
assets in foreign securities. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the fund pays MFS an annual management fee computed and
paid monthly. For the fiscal year ended August 31, 1999, the fund paid MFS
an aggregate management fee equal to 0.60% per annum of the fund's average
daily net assets.
-- PORTFOLIO MANAGER
The fund's portfolio manager is Lisa B. Nurme, a Senior Vice President of
MFS. Ms. Nurme has been employed as a portfolio manager by the adviser
since 1987 and has been the portfolio manager of the fund since the fund's
inception in January, 1996.
-- 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.
-- 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.
8
<PAGE> 333
V DESCRIPTION OF SHARE CLASSES
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 purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), 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>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
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.
9
<PAGE> 334
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.
In addition, 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:
- 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 (referred to as 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;
- 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; and
- the plan has not redeemed its class B shares in the MFS funds in
order to purchase class A shares under this category.
- 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
10
<PAGE> 335
- 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.
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
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.
11
<PAGE> 336
-- 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
appreciation or 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, which means that the CDSC will be applied
against the lesser of your direct investment or the total cost of your
shares. The applicability of a CDSC will not be affected by exchanges or
transfers of registration, except as described in the SAI.
-- 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 (0.10% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25% service
fee), 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.
12
<PAGE> 337
VI 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 by having your financial
adviser process your purchase. The minimum initial investment is $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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC 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
13
<PAGE> 338
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 may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and policies are described
below under the captions "Right to Reject or Restrict Purchase and Exchange
Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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.
14
<PAGE> 339
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS funds may
consider trading done in multiple accounts under common ownership or
control.
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.
15
<PAGE> 340
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.
16
<PAGE> 341
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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
17
<PAGE> 342
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.
18
<PAGE> 343
VIII 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). The New York Stock Exchange is closed on most national
holidays and Good Friday. 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 (excluding any
realized net capital gains) to shareholders as dividends at least
quarterly. Any realized net capital gains are distributed at least
annually.
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on
your particular tax situation.
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.
19
<PAGE> 344
You will normally have to pay federal income taxes, and any state or local
taxes, on the distributions you receive from the fund, whether you take the
distributions in cash or reinvest them in additional shares. Distributions
designated as capital gain dividends are taxable as long-term capital
gains. Other distributions 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.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if 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 will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to the fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding. Prospective investors should read the fund's
Account Application for additional information regarding backup withholding
of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
20
<PAGE> 345
-- 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.
21
<PAGE> 346
IX FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
fund's financial performance since the fund's inception. 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. The fund's Annual
Report is available upon request by contacting MFSC (see back cover for
address and telephone number). These financial statements are incorporated
by reference into the SAI. The fund's independent auditors are Ernst &
Young LLP.
22
<PAGE> 347
CLASS A SHARES
...........................................................................
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED AUGUST 31, ENDED
-------------------------- AUGUST 31,
1999 1998 1997 1996*
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data
(for a share outstanding throughout each
period):
Net asset value -- beginning of
period $ 14.20 $ 14.82 $11.07 $10.00
------- ------- ------ ------
Income from investment operations#--
Net investment income sec. $ 0.24 $ 0.22 $ 0.22 $ 0.13
Net realized and unrealized gain on
investments and foreign
currency### 3.17 1.07 3.91 0.94
------- ------- ------ ------
Total from investment operations $ 3.41 $ 1.29 $ 4.13 $ 1.07
------- ------- ------ ------
Less distributions declared to
shareholders --
From net investment income $ (0.22) $ (0.20) $(0.16) $ --
From net realized gain on
investments and foreign currency
transactions (0.22) (1.71) (0.22) --
------- ------- ------ ------
Total distributions declared to
shareholders $ (0.44) $ (1.91) $(0.38) $ --
------- ------- ------ ------
Net asset value -- end of period $ 17.17 $ 14.20 $14.82 $11.07
------- ------- ------ ------
Total return** 24.27% 9.50% 38.05% 10.70%++
======= ======= ====== ======
Ratios (to average net
assets)/Supplemental data sec.:
Expenses## 1.36% 1.46% 1.54% 1.50%+
Net investment income 1.47% 1.45% 1.75% 1.83%+
Portfolio turnover 97% 89% 118% 56%
Net assets at end of period (000
omitted) $51,753 $11,146 $ 510 $ 477
</TABLE>
--------------
sec. Effective November 1, 1997, subject to reimbursement by the fund,
the investment adviser agreed to maintain the expenses of the fund,
exclusive of management, distribution, and service fees, at not more
than 0.40% of average daily net assets. Prior to November 1, 1997,
subject to reimbursement by the fund, the investment adviser agreed
to maintain the expenses of the fund, exclusive of management,
distribution, and service fees, at not more than 1.50% of average
daily net assets. To the extent actual expenses were over/under this
limitation, the net investment income (loss) per share and the
ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) $0.24 $0.11 $0.02 $(0.06)
Ratios (to average net assets):
Expenses## 1.36% 2.20% 3.40% 4.67%+
Net investment income (loss) 1.47% 0.70% (0.15)% (0.78)%+
</TABLE>
* For the period from the commencement of the fund's investment
operations, January 2, 1996, through August 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund 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's expenses are
calculated without reduction for this expense offset arrangement.
### The per share amount is not in accordance with the net realized and
unrealized gain (loss) for the year ended August 31, 1998 because of
the timing of sales of fund shares and the amount of per share realized
and unrealized gains and losses at such time.
** 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.
23
<PAGE> 348
CLASS B SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1999 1998*
---------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value -- beginning of period $ 14.16 $ 13.61
------- -------
Income from investment operations# --
Net investment income sec. $ 0.14 $ 0.10
Net realized and unrealized gain on investments
and foreign currency### 3.15 0.47
------- -------
Total from investment operations $ 3.29 $ 0.57
------- -------
Less distributions declared to shareholders --
From net investment income $ (0.12) $ (0.02)
From net realized gain on investments and
foreign currency transactions (0.22) --
------- -------
Total distributions declared to shareholders $ (0.34) $ (0.02)
------- -------
Net asset value -- end of period $ 17.11 $ 14.16
======= =======
Total return 23.47% 4.20%++
Ratios (to average net assets)/Supplemental
data sec.:
Expenses## 2.01% 2.11%+
Net investment income 0.83% 0.66%+
Portfolio turnover 97% 89%
Net assets at end of period (000 omitted) $52,586 $16,786
</TABLE>
--------------
sec. Subject to reimbursement by the fund, the investment adviser agreed
to maintain the expenses of the fund, exclusive of management,
distribution, and service fees, at not more than 0.40% of average
daily net assets. To the extent actual expenses were over/under this
limitation, the net investment income (loss) per share and the
ratios would have been:
<TABLE>
<S> <C> <C>
Net investment income (loss) $ 0.14 $ (0.02)
Ratios (to average net assets):
Expenses## 2.01% 2.85%+
Net investment income (loss) 0.83% (0.09)%+
</TABLE>
* For the period from the inception of Class B, November 4, 1997, through
August 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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's expenses are
calculated without reduction for this expense offset arrangement.
### The per share amount is not in accordance with the net realized and
unrealized gain (loss) for the period ended August 31, 1998 because of
the timing of sales of fund shares and the amount of per share realized
and unrealized gains and losses at such time.
24
<PAGE> 349
CLASS C SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1999 1998*
---------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value -- beginning of period $ 14.16 $13.63
------- ------
Income from investment operations# --
Net investment income sec. $ 0.14 $ 0.10
Net realized and unrealized gain on investments
and foreign currency### 3.15 0.45
------- ------
Total from investment operations $ 3.29 $ 0.55
------- ------
Less distributions declared to shareholders --
From net investment income $ (0.13) $(0.02)
From net realized gain on investments and
foreign currency transactions (0.22) --
------- ------
Total distributions declared to shareholders $ (0.35) $(0.02)
------- ------
Net asset value -- end of period $ 17.10 $14.16
======= ======
Total return 23.47% 4.02%++
Ratios (to average net assets)/Supplemental
data sec.:
Expenses## 2.01% 2.09%+
Net investment income 0.84% 0.66%+
Portfolio turnover 97% 89%
Net assets at end of period (000 omitted) $19,053 $3,613
</TABLE>
--------------
sec. Subject to reimbursement by the fund, the investment adviser agreed
to maintain the expenses of the fund, exclusive of management,
distribution, and service fees, at not more than 0.40% of average
daily net assets. To the extent actual expenses were over/under this
limitation, the net investment income (loss) per share and the
ratios would have been:
<TABLE>
<S> <C> <C>
Net investment income (loss) $0.14 $(0.02)
Ratios (to average net assets):
Expenses## 2.01% 2.83%+
Net investment income (loss) 0.84% (0.09)%+
</TABLE>
* For the period from the inception of Class C, November 5, 1997, through
August 31, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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's expenses are
calculated without reduction for this expense offset arrangement.
### The per share amount is not in accordance with the net realized and
unrealized gain (loss) for the period ended August 31, 1998 because of
the timing of sales of fund shares and the amount of per share realized
and unrealized gains and losses at such time.
25
<PAGE> 350
APPENDIX A
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are also
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<S> <C>
SYMBOLS X permitted -- not permitted
-----------------------------------------------------------
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities X
Corporate Asset-Backed Securities X
Mortgage Pass-Through Securities X
Stripped Mortgage-Backed Securities X
Corporate Securities X
Loans and Other Direct Indebtedness X
Lower Rated Bonds X
Municipal Bonds X
Speculative Bonds X
U.S. Government Securities X
Variable and Floating Rate
Obligations X
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds X
Equity Securities X
Foreign Securities Exposure
Brady Bonds X
Depositary Receipts X
Dollar-Denominated Foreign Debt
Securities X
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities X
Inverse Floating Rate Obligations --
</TABLE>
A-1
<PAGE> 351
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
................................................................................
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds X
Closed-End Funds X
Lending of Portfolio Securities X
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions X*
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies X
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options X
"Yield Curve" Options X
Repurchase Agreements X
Restricted Securities X
Short Sales --
Short Sales Against the Box --
Short Term Instruments X
Swaps and Related Derivative Instruments X
Temporary Borrowings X
Temporary Defensive Positions X
Warrants X
"When-issued" Securities X
</TABLE>
- ---------
* The fund may only enter into "covered" mortgage dollar-roll transactions,
meaning that the fund segregates liquid securities equal in value to the
securities it will repurchase and does not use these transactions as a form
of leverage.
A-2
<PAGE> 352
MFS(R) EQUITY INCOME 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 January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
MEI-1 12/99 199M 93/293/393/893
<PAGE> 353
[MFS EQUITY INCOME FUND LOGO]
JANUARY 1, 2000
<TABLE>
<S> <C>
[MFS 75 YEARS LOGO] STATEMENT OF ADDITIONAL
INFORMATION
A SERIES OF MFS SERIES TRUST I
500 BOYLSTON STREET, BOSTON, MA 02116 This SAI is divided into two Parts -- Part I and
(617) 954-5000 Part II. Part I contains information that is
particular to the Fund, while Part II contains
This Statement of Additional Information, as information that generally applies to each of
amended or supplemented from time to time (the the funds in the MFS Family of Funds (the "MFS
"SAI"), sets forth information which may be of Funds"). Each Part of the SAI has a variety of
interest to investors but which is not appendices which can be found at the end of Part
necessarily included in the Fund's Prospectus I and Part II, respectively.
dated January 1, 2000. This SAI should be read THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED
in conjunction with the Prospectus. The Fund's FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY
financial statements are incorporated into this IF PRECEDED OR ACCOMPANIED BY A CURRENT
SAI by reference to the Fund's most recent PROSPECTUS.
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 of Part II
of this SAI for address and phone number).
</TABLE>
MEI-13 12/99 600
<PAGE> 354
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 2
VIII Tax Considerations.......................................... 3
IX Independent Auditors and Financial Statements............... 3
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
</TABLE>
<PAGE> 355
I DEFINITIONS
"Fund" - MFS Equity Income Fund, a diversified series of the Trust.
"Trust" - MFS Series Trust I, a Massachusetts business Trust, organized on July
22, 1986. The Trust was known as "MFS Lifetime Managed Sectors Fund" prior to
August 1, 1993, and as "Lifetime Managed Sectors Trust" prior to August 3, 1992.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated January 1, 2000, as amended or
supplemented from time to time.
II 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 had contractually agreed to bear expenses for the MFS Equity Income Fund,
subject to reimbursement, such that the Fund's "Other Expenses" would not exceed
0.40% of the average daily net assets of the Fund during a fiscal year. The Fund
is now paying an expense reimbursement fee in order to reimburse MFS for the
payments previously made by MFS on behalf of the Fund under this arrangement.
This fee is computed and paid monthly at a percentage of the Fund's average
daily net assets for its current fiscal year, with a limitation that immediately
after such payment the Fund's "Other Expenses" will not exceed 0.40% of the
average daily net assets of the Fund for its current fiscal year. The obligation
of MFS to bear the Fund's "Other Expenses" pursuant to this arrangement, and the
Fund's obligation to pay the reimbursement fee 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 on August 31, 2006.
III 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.
IV 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.
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 certain other MFS Funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS Funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
V 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.
VI 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.
VII 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
Part I -- 1
<PAGE> 356
Appendix A to the Prospectus, and are more fully described, together with their
associated risks, in Part II of this SAI. The following percentage limitations
apply to these investment techniques and practices:
- - Foreign Securities may not exceed 35% of the Fund's net assets
- - Lending of Portfolio Securities may not exceed 30% of the Fund's net assets
- - Lower Rated Bonds may be up to (but not including) 20% of net assets
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 the Fund or class, as applicable, or (ii) 67% or more of the
outstanding shares of the Trust or the Fund or class, as applicable, present at
a meeting at which holders of more than 50% of the outstanding shares of the
Trust or the Fund or class, as applicable, are represented in person or by
proxy). Except with respect to the Fund's policy on borrowing and investing in
illiquid securities, these investment restrictions and policies are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy. In the
event of a violation of nonfundamental investment policy (1), the Fund will
reduce the percentage of its assets invested in illiquid investments in due
course, taking into account the best interests of shareholders.
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding Options, Options on
Futures Contracts, Options on Stock Indices, Options on Foreign Currency
and any other type of option, Futures Contracts, any other type of futures
contract, and Forward Contracts) in the ordinary course of its business.
The Fund reserves the freedom of action to hold and to sell real estate,
mineral leases, commodities or commodity contracts (including Options,
Options on Futures Contracts, Options on Stock Indices, Options on Foreign
Currency and any other type of option, Futures Contracts, any other type
of futures contract, and Forward Contracts) acquired as a result of the
ownership of securities;
(4) issue any senior securities except as permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). For purposes of this
restriction, collateral arrangements with respect to any type of option
(including Options on Futures Contracts, Options, Options on Stock Indices
and Options on Foreign Currencies), short sale, Forward Contracts, Futures
Contracts, any other type of futures contract, and collateral arrangements
with respect to initial and variation margin, are not deemed to be the
issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue
of debt securities, the lending of portfolio securities, or the investment
of the Fund's assets in repurchase agreements shall not be considered the
making of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities
of issuers whose principal business activities are in the same industry
(except obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements collateralized by
such obligations).
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 for the purpose of exercising control or management;
(3) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross assets.
For purposes of this restriction, collateral arrangements with respect to
any type of option (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any short
sale, any type of futures contract (including Futures Contracts), Forward
Contracts and
Part I -- 2
<PAGE> 357
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets;
(4) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry; or
(5) with respect to 75% of its total assets, (i) purchase more than 10% of the
outstanding voting securities of any one issuer; or (ii) purchase
securities of any issuer if as a result more than 5% of the Fund's total
assets would be invested in that issuer's securities. This limitation does
not apply to obligations of the U.S. Government or its agencies or
instrumentalities.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for each of the two years in the period
ended August 31, 1999, 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 -- 3
<PAGE> 358
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 and President (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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director.
Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor. Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer. Address: 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: Boston,
Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
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);
Cambridge Nutraceuticals (professional nutritional products), Chief Executive
Officer. Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to June, 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director. Address:
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------------------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS 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.), an indirect subsidiary of Sun Life Assurance Company of Canada.
Part I -- A-1
<PAGE> 359
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 $1,250 per year
plus $225 per meeting and $225 per committee meeting attended, together with
such Trustee's out-of-pocket expenses. 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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT
BENEFIT TOTAL
TRUSTEE ACCRUED ESTIMATED TRUSTEE FEES
FEES AS PART OF CREDITED FROM FUND AND
FROM FUND YEARS OF FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $0 $0 6 $259,430
Marshall N. Cohan 0 0 6 143,259
Lawrence H. Cohn, M.D. 0 0 16 153,579
The Hon. Sir J. David Gibbons, KBE 0 0 6 130,059
Abby M. O'Neill 0 0 7 130,059
Walter E. Robb, III 0 0 6 171,154
Arnold D. Scott N/A N/A N/A N/A
Jeffrey L. Shames N/A N/A N/A N/A
J. Dale Sherratt 0 0 18 157,714
Ward Smith 0 0 10 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ended August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- ---------------------------------------------
<S> <C> <C> <C> <C>
$2,558 $384 $639 $ 895 $1,279
2,820 423 705 987 1,410
3,082 462 771 1,079 1,541
3,344 502 836 1,171 1,672
3,607 541 902 1,262 1,803
3,869 580 967 1,354 1,934
</TABLE>
- -------------------------------
(4) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees. For the fiscal year ended August 31, 1999, the Trustee fees
for the Fund were waived.
Part I -- B-1
<PAGE> 360
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $413,740 $ 0 $9,172 $72,836 $ 0 $495,748
August 31, 1998 90,551 1,988 1,980 14,918 0 107,449
August 31, 1997 0 6,926 83* 0 1,209 83
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 361
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $738,709 $111,219 $627,490 $1,280 $68,666 $2,641
August 31, 1998 284,303 45,026 239,277 1,940 9,198 525
August 31, 1997 0 0 0 0 0 0
</TABLE>
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>
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
<S> <C>
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, 1999, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $ 90,373 $ 28,916 $61,457
Class B Shares 315,248 236,499 78,749
Class C Shares 94,939 5 94,934
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE> 362
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $275,176
August 31, 1998 58,282
August 31, 1997 2,508
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- ---------------------------------------------------------------
<S> <C>
Bank of America Corp. $1,532,465
</TABLE>
Part I -- E-1
<PAGE> 363
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 30, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares, not including 199,186
Class I shares of the Fund (which represent approximately 100% 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 September 30, 1999, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
..........................................................................................
<S> <C>
MLPF&S for the Sole Benefit of its Customers 5.07% of Class B shares
Attn: Fund Administration
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
..........................................................................................
MLPF&S for the Sole Benefit of its Customers 7.81% of Class C shares
Attn: Fund Administration 97SM3
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
..........................................................................................
TRS MFS DEF Contribution Plan 89.86% of Class I shares
c/o Mark Leary 19th FL
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
..........................................................................................
TRS MFS 401(K) Plan 10.14% of Class I shares
c/o Mark Leary
500 Boylston Street
19th Floor
Boston, MA 02116-3740
..........................................................................................
</TABLE>
Part I -- F-1
<PAGE> 364
PART I - APPENDIX G
PERFORMANCE INFORMATION
................................................................................
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
-------------- (INCLUDING (WITHOUT ANY Distribution
1 YEAR LIFE* WAIVERS) WAIVERS) RATE+
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (5.75%) 17.13% 20.17% 0.91% -0.75% 2.23%
Class A Shares, at net asset value 24.27% 22.13% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) 19.47% 21.27% N/A N/A N/A
Class B Shares, at net asset value 23.47% 21.75% 0.32% -1.45% 1.77%
Class C Shares, with CDSC (1% for
first year) 22.47% 21.74% N/A N/A N/A
Class C Shares, at net asset value 23.47% 21.74% 0.32% -1.44% 1.83%
Class I Shares, at net asset value 24.97% 22.20% 1.32% -0.46% 2.64%
</TABLE>
- -------------------------------
* From commencement of the Fund's investment operations on January 2, 1996.
+ Annualized, based upon the last distribution.
The Fund commenced investment operations on January 2, 1996, with the offering
of class A shares and subsequently offered class B shares on November 4, 1997,
class C shares on November 5, 1997, and class I shares on January 2, 1997. Class
B, C and I share performance include the performance of the Fund's class A
shares for periods prior to the offering of class B, C and I shares. The blended
class B and class C share performance has been adjusted to take into account the
CDSC applicable to class B and class C shares, rather than the initial sales
charge (load) applicable to class A shares. The blended class I share
performance has been adjusted to take into account the fact that class I shares
have no initial sales charge (load). This blended performance has not been
adjusted to take into account differences in class specific operating expenses.
Because operating expenses of class B and C shares are higher than those of
class A shares, the blended class B and C share performance is higher than the
performance of class B and C shares would have been had class B and C shares
been offered for the entire period. Conversely, because operating expenses of
class I shares are lower than those of class A shares, the blended class I share
performance is lower than the performance of class I shares would have been had
class I shares been offered for the entire period. If you would like the Fund's
current yield, contact the MFS Service Center at the toll free number set forth
on the back cover page of Part II of this SAI.
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
Part I -- G-1
<PAGE> 365
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE> 366
MFS(R) RESEARCH INTERNATIONAL FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2000. 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 "Description of Share Classes" below.
RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is intended to indicate some of
the risks of investing in the fund by showing changes in the fund's performance
over time. The table is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
1 YEAR LIFE*
------ -----
<S> <C> <C>
Class I shares 14.44% 12.30%
Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia, Far East) Index#+ 20.33% 10.82%
Average international fund++ 12.99% 9.10%
</TABLE>
- -------------------------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on January 2, 1997, through December 31, 1998.
Index and Lipper average returns are from January 1, 1997.
# The Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia,
Far East) Index is a broad based, unmanaged, market-capitalization-weighted
total return index which measures the performance of 20 developed-country
global stock markets.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
The fund commenced investment operations on January 2, 1997, with the offering
of class A shares and class I shares.
EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
<S> <C>
Management Fees....................................... 1.00%
Distribution and Service (12b-1) Fees................. 0.00%
Other Expenses........................................ 1.15%
----
Total Annual Fund Operating Expenses.................. 2.15%
Expense Reimbursement(1).......................... (0.73)%
----
Net Expenses(2)................................... 1.42%
</TABLE>
- -----------------------
(1) MFS has contractually agreed to bear the fund's expenses subject to
reimbursement, such that "Other Expenses", after taking into account the
expense offset arrangement described below, do not exceed 0.40%. These
contractual fee arrangements will continue until at least January 1, 2001,
absent an earlier modification approved by the board of trustees which
oversees the fund.
(2) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. 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. Had these fee reductions been taken into
account, "Net Expenses" would be lower, and would equal 1.40% for class I.
-1-
<PAGE> 367
EXAMPLE OF EXPENSES. The "Example of Expenses" table is intended to help
you compare the cost of investing in the fund with the cost of investing in
other mutual funds. The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses"
for the first year, and the fund's "Total Annual Fund Operating
Expenses" for subsequent years (see Expense Table).
The table is supplemented as follows:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class I shares $145 $603 $1,087 $2,425
</TABLE>
DESCRIPTION OF SHARE CLASSES
The "Description of Share Classes" 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).
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, on behalf of their clients (i) initially invest
at least $100,000 in class I shares of the fund or (ii) have, at the
time of purchase of class I shares, aggregate assets of at least $10
million invested in class I shares of the fund either alone or in
combination with investments in class I shares of other MFS Funds. MFD
may accept purchases that do not meet these dollar qualification
requirements if it believes, in its sole discretion, that these
requirements will be met within a reasonable period of time.
Additional investments may be made in any amount; 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.
-2-
<PAGE> 368
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.
FINANCIAL HIGHLIGHTS
The "Financial Highlights" table is intended to help you understand the fund's
financial performance. It is supplemented as follows:
FINANCIAL STATEMENTS - CLASS I SHARES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, PERIOD ENDED
1999 1998 AUGUST 31, 1997*
---- ---- ----------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.26 $ 10.95 $ 10.00
-------- -------- --------
Income from investment operations# -
Net investment incomess. $ 0.05 $ 0.06 $ 0.07
Net realized and unrealized gain on investments and
foreign currency 2.42 0.34 0.88
-------- -------- --------
Total from investment operations $ 2.47 $ 0.40 $ 0.95
-------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.02) $ (0.05) $ --
From net realized gain on investments and foreign
currency transactions (0.16) (1.04) --
-------- -------- --------
Total distributions declared to shareholders $ (0.18) $ (1.09) $ --
-------- -------- --------
Net asset value - end of period $ 12.55 $ 10.26 $ 10.95
-------- -------- --------
Total return 24.08% 4.13% 9.60%++
Ratios (to average net assets)/Supplemental datass.:
Expenses## 1.37% 1.40% 1.68%+
Net investment income 0.47% 0.53% 0.85%+
Portfolio turnover 136% 89% 137%
Net assets at end of period (000 omitted) $ 1,047 $ 1,199 $ 1,022
ss. Subject to reimbursement by the fund, the investment adviser voluntarily agreed to maintain the expenses of the fund, exclusive
of management fees, at not more than 0.40% of average daily net assets. For the period ended August 31, 1997, the investment
adviser agreed to maintain the expenses of the fund at not more than 1.75% of the fund's average daily net assets. The
investment adviser and shareholder servicing agent did not impose any of their fees for the period ended August 31, 1997. If
these fees had not been waived and actual expenses had been over this limitation, the net investment loss per share and the
ratios would have been:
Net investment loss $ (0.03) $ (0.15) $ --
Ratios (to average net assets):
Expenses## 2.10% 3.55% 2.81%+
Net investment loss (0.26)% (1.61)% (0.28)% +
</TABLE>
* For the period from the commencement of the fund's investment operations,
January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The fund has an expense offset arrangement which reduces the fund's
custodian fees based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent. The fund's expenses are
calculated without reduction for this expense offset arrangement.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000.
-3-
<PAGE> 369
[MFS
RESEARCH
INTERNATIONAL
FUND
JANUARY 1, 2000]
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------
This Prospectus describes the MFS(R) Research International
Fund. The fund's investment objective is capital
appreciation.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
FUND'S SHARES OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 370
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary...................................... 1
II Expense Summary.......................................... 6
III Certain Investment Strategies and Risks.................. 8
IV Management of the Fund................................... 9
V Description of Share Classes............................. 10
VI How to Purchase, Exchange and Redeem Shares.............. 14
VII Investor Services and Programs........................... 18
VIII Other Information........................................ 20
IX Financial Highlights..................................... 22
Appendix A -- Investment Techniques and Practices........ A-1
</TABLE>
<PAGE> 371
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's investment objective is capital appreciation. The fund's
objective may be changed without shareholder approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its total
assets in common stocks and related securities, such as preferred stocks,
convertible securities and depositary receipts, of foreign companies. The
fund focuses on foreign companies (including emerging market issuers) that
the fund's investment adviser, Massachusetts Financial Services Company
(referred to as MFS or the adviser), believes have favorable growth
prospects and attractive valuations based on current and expected earnings
or cash flow. The fund does not emphasize any particular country and, under
normal market conditions, will be invested in at least five countries.
Equity securities may be listed on a securities exchange or traded in the
over-the-counter markets.
A committee of investment research analysts selects portfolio securities
for the fund. This committee includes investment analysts employed by MFS
and its affiliates. The committee allocates the fund's assets among various
geographic regions and industries. Individual analysts then select what
they view as the securities best suited to achieve the fund's investment
objective within their assigned industry responsibility.
A company's principal activities are determined to be located in a
particular country if the company (a) is organized under the laws of, and
maintains a principal office in a country, (b) has its principal securities
trading market in a country, (c) derives 50% of its total revenues from
goods or services performed in the country, or (d) has 50% or more of its
assets in the country.
The fund has engaged and may engage in active and frequent trading to
achieve its principal investment strategies.
-- PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
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 disappointing earnings results.
1
<PAGE> 372
- Company Risk: Prices of securities react to the economic condition of
the company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
- Foreign Markets Risk: Investing in foreign securities involves 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, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. 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. Certain
foreign currencies may be particularly volatile, and foreign
governments may intervene in the currency markets, causing a
decline in value or liquidity in the fund's foreign currency
holdings. By entering into forward foreign currency exchange
contracts, the fund may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of forward
contracts entered into for the purpose of increasing return, the
fund may sustain losses which will reduce its gross income. Forward
foreign currency exchange contracts involve the risk that the party
with which the fund enters the contract may fail to perform its
obligations to the fund.
- Emerging Markets Risk: 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
2
<PAGE> 373
markets often have provided significantly higher or lower rates of
return than developed markets, and significantly greater risks, to
investors.
- Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those incurred by transactions in securities traded on
exchanges. OTC-listed companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in
smaller volume than exchange-listed stocks. The values of these stocks
may be more volatile than exchange-listed stocks, and the fund may
experience difficulty in purchasing or selling these securities at a fair
price.
- Geographic Concentration Risk: The fund may invest a substantial amount
of its assets in issuers located in a single country or a limited number
of countries. If the fund concentrates its investments in this manner, it
assumes the risk that economic, political and social conditions in those
countries will have a significant impact on its investment performance.
The fund's investment performance may also be more volatile if it
concentrates its investments in certain countries, especially emerging
market countries.
- Active or Frequent Trading Risk: The fund has engaged and 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 as compared to a fund with less
active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could detract
from the fund's performance.
- 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.
-- 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 changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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.
3
<PAGE> 374
BAR CHART
The bar chart shows changes in the annual total returns of the fund's class
A shares. The chart and related notes do not take into account any sales
charges (loads) 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.
[Performance Graph]
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<S> <C>
1997 10.12%
1998 13.84%
</TABLE>
The total return for the nine-month period ended September 30, 1999 was
13.32%. During the period shown in the bar chart, the highest quarterly
return was 17.88% (for the calendar quarter ended March 31, 1998) and the
lowest quarterly return was (17.46)% (for the calendar quarter ended
September 30, 1998).
4
<PAGE> 375
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compare to one or more broad measures of market performance and
assumes the reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year Life*
<S> <C> <C>
Class A shares 7.29% 8.72%
Class B shares 9.47% 10.02%
Class C shares 12.27% 11.72%
Morgan Stanley Capital International (MSCI)
EAFE (Europe, Australia, Far East) Index+# 20.33% 10.82%
Average international fund++ 12.99% 9.10%
</TABLE>
- ---------------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on January 2, 1997, through December 31,
1998. Index and Lipper average returns are from January 1, 1997.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
# The Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia,
Far East) Index is a broad based, unmanaged,
market-capitalization-weighted total return index which measures the
performance of 20 developed-country global stock markets.
Class A share performance takes into account the deduction of the 5.75%
maximum sales charge. Class B share 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 share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on January 2, 1997 with the
offering of class A shares and subsequently offered class B and C shares on
January 2, 1998. 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. This blended class B and class C share
performance has been adjusted to take into account the CDSC applicable to
class B and class C shares, rather than the initial sales charge (load)
applicable to class A shares. This blended performance has not been
adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B and C shares are higher
than those of class A shares, this blended class B and class C share
performance is higher than the performance of class B and C shares would
have been had class B and C shares been offered for the entire period.
5
<PAGE> 376
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of
offering price).................... 5.75% 0.00% 0.00%
Maximum Deferred Sales Charge
(Load) (as a percentage of original
purchase price or redemption
proceeds, whichever is less)....... See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
...........................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees........................... 1.00% 1.00% 1.00%
Distribution and Service (12b-1)
Fees(2)................................... 0.35% 1.00% 1.00%
Other Expenses............................ 1.15% 1.15% 1.15%
------ ------ ------
Total Annual Fund Operating Expenses...... 2.50% 3.15% 3.15%
Expense Reimbursement(3)............. (0.73)% (0.73)% (0.73)%
------ ------ ------
Net Expenses(4)...................... 1.77% 2.42% 2.42%
</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) MFS has contractually agreed to bear the fund's expenses subject to
reimbursement, such that "Other Expenses", after taking into account
the expense offset arrangement described below, do not exceed 0.40%.
These contractual fee arrangements will continue until at least January
1, 2001, absent an earlier modification approved by the board of
trustees which oversees the fund.
(4) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with
its custodian and dividend disbursing agent. 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. Had these fee
reductions been taken into account, "Net Expenses" would be lower, and
would equal 1.75%, 2.40% and 2.40% for classes A, B and C,
respectively.
6
<PAGE> 377
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same, except that the fund's
total operating expenses are assumed to be the fund's "Net Expenses" for
the first year, and the fund's "Total Annual Fund Operating Expenses" for
subsequent years (see Expense Table).
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $745 $1,243 $1,767 $3,196
Class B shares(1)
Assuming redemption at end of
period 645 1,203 1,786 3,256
Assuming no redemption 245 903 1,586 3,256
Class C shares
Assuming redemption at end of
period 560 903 1,586 3,407
Assuming no redemption 245 903 1,586 3,407
</TABLE>
- ---------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A expenses.
7
<PAGE> 378
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
------------------------------------------------------
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
--------------------------
In addition, 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's defensive
investment position may not be effective in protecting its value.
8
<PAGE> 379
IV 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 $122.8 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of
assets in equity securities, approximately $21.2 billion of assets in fixed
income funds and fixed income portfolios and approximately $8.9 billion of
assets in foreign securities. MFS is located at 500 Boylston Street,
Boston, Massachusetts 02116.
MFS provides investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the fund pays MFS an annual management fee computed and
paid monthly. For the fiscal year ended August 31, 1999, the fund paid MFS
an aggregate management fee equal to 1.00% per annum of the fund's average
daily net assets.
-- PORTFOLIO MANAGER
The fund is managed by a committee of investment research analysts under
the general supervision of David A. Antonelli, Senior Vice President and
the Director of International Equity Research. Mr. Antonelli has been
employed as a portfolio manager by MFS since 1991.
-- 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.
-- 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.
9
<PAGE> 380
V DESCRIPTION OF SHARE CLASSES
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 purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), 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>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
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.
10
<PAGE> 381
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.
In addition, 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:
- 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 (referred to as 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;
- 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; and
- the plan has not redeemed its class B shares in the MFS funds in
order to purchase class A shares under this category.
- 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
11
<PAGE> 382
- 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.
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
---------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
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.
12
<PAGE> 383
-- 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
appreciation or 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, which means that the CDSC will be applied
against the lesser of your direct investment or the total cost of your
shares. The applicability of a CDSC will not be affected by exchanges or
transfers of registration, except as described in the SAI.
-- 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 (0.10% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25% service
fee), 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.
13
<PAGE> 384
VI 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 by having your financial
adviser process your purchase. The minimum initial investment is $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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC 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
14
<PAGE> 385
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 may be subject to certain limitations and are subject to the MFS
funds' policies concerning excessive trading practices, which are policies
designed to protect the funds and their shareholders from the harmful
effect of frequent exchanges. These limitations and policies are described
below under the captions "Right to Reject or Restrict Purchase and Exchange
Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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.
15
<PAGE> 386
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive, short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS funds may
consider trading done in multiple accounts under common ownership or
control.
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.
16
<PAGE> 387
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.
17
<PAGE> 388
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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
18
<PAGE> 389
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.
19
<PAGE> 390
VIII 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). The New York Stock Exchange is closed on most national
holidays and Good Friday. 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 any
realized net capital gains) to shareholders as dividends at least annually.
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on
your particular tax situation.
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 distributions you receive from the fund, whether you take the
distributions in
20
<PAGE> 391
cash or reinvest them in additional shares. Distributions designated as
capital gain dividends are taxable as long-term capital gains. Other
distributions 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.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if 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 will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to the fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding. Prospective investors should read the fund's
Account Application for additional information regarding backup withholding
of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
-- 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.
21
<PAGE> 392
IX FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
fund's financial performance since the fund's inception. 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. The fund's Annual
Report is available upon request by contacting MFSC (see back cover for
address and telephone number). These financial statements are incorporated
by reference into the SAI. The fund's independent auditors are Ernst &
Young LLP.
22
<PAGE> 393
CLASS A SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, PERIOD ENDED
---------------- AUGUST 31,
1999 1998 1997*
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data
(for a share outstanding throughout each
period):
Net asset value - beginning of period $ 10.24 $10.95 $10.00
------- ------ ------
Income from investment operations# -
Net investment income sec. $ 0.03 $ 0.03 $ 0.06
Net realized and unrealized gain on
investments and foreign currency 2.36 0.35 0.89
------- ------ ------
Total from investment operations $ 2.39 $ 0.38 $ 0.95
------- ------ ------
Less distributions declared to shareholders-
From net investment income $ (0.01) $(0.05) $ --
From net realized gain on investments and
foreign currency transactions (0.15) (1.04) --
------- ------ ------
Total distributions declared to
shareholders $ (0.16) $(1.09) $ --
------- ------ ------
Net asset value - end of period $ 12.47 $10.24 $10.95
======= ====== ======
Total return** 23.53% 3.92% 9.60%++
Ratios (to average net assets)/Supplemental
data sec.:
Expenses## 1.72% 1.76% 1.68%+
Net investment income 0.27% 0.28% 0.71%+
Portfolio turnover 136% 89% 137%
Net assets at end of period (000 omitted) $16,839 $3,741 $1,314
</TABLE>
sec. Subject to reimbursement by the fund, the investment adviser agreed to
maintain the expenses of the fund, exclusive of management and
distribution and service fees, at not more than 0.40% of average daily
net assets. For the period ended August 31, 1997, the investment
adviser agreed to maintain the expenses of the fund at not more than
1.75% of the fund's average daily net assets. The investment adviser,
distributor, and shareholder servicing agent did not impose any of
their fees for the period ended August 31, 1997. If these fees had not
been waived and actual expenses had been over this limitation, the net
investment loss per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment loss $ (0.05) $(0.19) $(0.01)
Ratios (to average-net assets):
Expenses## 2.45% 3.99% 3.31%+
Net investment loss (0.46)% (1.94)% (0.91)%+
</TABLE>
* For the period from the commencement of the fund's investment operations,
January 2, 1997 through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund 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's expenses are
calculated without reduction for this expense offset arrangement.
** 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.
23
<PAGE> 394
CLASS B SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------
1999 1998*
--------------------------------------------------------------------------
<S> <C> <C>
Per share data
(for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.21 $ 9.93
------- ------
Income from investment operations# --
Net investment loss sec. $ (0.04) $(0.03)
Net realized and unrealized gain on investments
and foreign currency 2.35 0.31
------- ------
Total from investment operations $ 2.31 $ 0.28
------- ------
Less distributions declared to shareholders -
From net investment income $ (0.00)+++ $ --
From net realized gain on investments and foreign
currency transactions (0.15) --
------- ------
Total distributions declared to shareholders $ (0.15) $ --
------- ------
Net asset value - end of period $ 12.37 $10.21
======= ======
Total return 22.84% 2.82%++
Ratios (to average net assets)/Supplemental
data sec.:
Expenses## 2.37% 2.41%+
Net investment loss (0.36)% (0.29)%+
Portfolio turnover 136% 89%
Net assets at end of period (000 omitted) $10,683 $3,141
</TABLE>
sec. Subject to reimbursement by the fund, the investment adviser agreed to
maintain the expenses of the fund, exclusive of management and
distribution fees, at not more than 0.40% of average daily net assets.
To the extent actual expenses were over this limitation, the net
investment loss per share and the ratios would have been:
<TABLE>
<S> <C> <C>
Net investment loss $ (0.12) $(0.24)
Ratios (to average net assets):
Expenses## 3.10% 4.56%+
Net investment loss (1.09)% (2.43)%+
</TABLE>
* For the period from the inception of class B, January 2, 1998, through
August 31, 1998.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## 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's expenses are
calculated without reduction for this expense offset arrangement.
24
<PAGE> 395
CLASS C SHARES
...........................................................................
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------
1999 1998*
-----------------------------------------------------------------------
<S> <C> <C>
Per share data
(for a share outstanding throughout each period):
Net asset value - beginning of period $10.21 $ 9.93
------ ------
Income from investment operations# --
Net investment loss sec. $(0.04) $(0.01)
Net realized and unrealized gain on
investments and foreign currency 2.34 0.29
------ ------
Total from investment operations $ 2.30 $ 0.28
------ ------
Less distributions declared to shareholders -
From net investment income $(0.00)+++ $ --
From net realized gain on investments and
foreign currency transactions (0.15) --
------ ------
Total distributions declared to
shareholders $(0.15) $ --
------ ------
Net asset value - end of period $12.36 $10.21
====== ======
Total return 22.74% 2.82%++
Ratios (to average net assets)/Supplemental
data sec.:
Expenses## 2.37% 2.40%+
Net investment loss (0.33)% (0.10)%+
Portfolio turnover 136% 89%
Net assets at end of period (000 omitted) $3,802 $ 729
</TABLE>
sec. Subject to reimbursement by the fund, the investment adviser agreed to
maintain the expenses of the fund, exclusive of management and
distribution fees, at not more than 0.40% of average daily net assets.
To the extent actual expenses were over this limitation, the net
investment loss per share and the ratios would have been:
<TABLE>
<S> <C> <C>
Net investment loss $(0.12) $(0.22)
Ratios (to average net assets):
Expenses## 3.10% 4.55%+
Net investment loss (1.06)% (2.24)%+
</TABLE>
* For the period from the inception of class C, January 2, 1998, through
August 31, 1998.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## 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's expenses are
calculated without reduction for this expense offset arrangement.
25
<PAGE> 396
APPENDIX A
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are also
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<CAPTION>
SYMBOLS X permitted -- not permitted
-----------------------------------------------------------
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities X
Stripped Mortgage-Backed Securities --
Corporate Securities X
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities X
Variable and Floating Rate
Obligations --
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds --
Equity Securities X
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts X
Dollar-Denominated Foreign Debt
Securities X
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities X
Inverse Floating Rate Obligations --
</TABLE>
A-1
<PAGE> 397
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
................................................................................
<TABLE>
<S> <C>
Investment in Other Investment Companies
Open-End Funds X
Closed-End Funds X
Lending of Portfolio Securities X
Leveraging Transactions
Bank Borrowings --
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements --
Options
Options on Foreign Currencies X
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options X
"Yield Curve" Options X
Repurchase Agreements X
Restricted Securities X
Short Sales --
Short Sales Against the Box --
Short Term Instruments X
Swaps and Related Derivative Instruments X
Temporary Borrowings X
Temporary Defensive Positions X
Warrants X
"When-issued" Securities X
</TABLE>
A-2
<PAGE> 398
MFS(R)RESEARCH INTERNATIONAL 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 January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
MRI-1 12/99 94M 99/299/399/899
<PAGE> 399
-----------------------------------------
[MFS(R) RESEARCH INTERNATIONAL FUND LOGO]
-----------------------------------------
JANUARY 1, 2000
[MFS 75 YEARS LOGO]
STATEMENT OF ADDITIONAL INFORMATION
A SERIES OF MFS SERIES TRUST I
500 BOYLSTON STREET, BOSTON, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
January 1, 2000. 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 of
Part II of this SAI 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.
MRI-13 12/99 600
<PAGE> 400
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
- -----------------
TABLE OF CONTENTS
- -----------------
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 1
VIII Tax Considerations.......................................... 2
IX Independent Auditors and Financial Statements............... 2
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
</TABLE>
<PAGE> 401
I DEFINITIONS
"Fund" - MFS Research International Fund, a diversified series of the Trust.
"Trust" - MFS Series Trust I, a Massachusetts business trust, organized on July
22, 1986. The Trust was known as "MFS Lifetime Managed Sectors Fund" prior to
August 1, 1993, and as "Lifetime Managed Sectors Trust" prior to August 3, 1992.
"MFS" or the "Adviser" - Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" - MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" - The Prospectus of the Fund, dated January 1, 2000, as amended or
supplemented from time to time.
II 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.
III 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.
IV 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.
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 certain other MFS Funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS Funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
V 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.
VI 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.
VII 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 A to the Prospectus, and are more fully
described, together with their associated risks, in Part II of this SAI. The
following percentage limitations apply to these investment techniques and
practices:
- - Emerging Market Securities may not exceed 25% of the Fund's net assets
- - Lending of Portfolio Securities may not exceed 30% of the Fund's net assets
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 the Fund or class, as applicable, or (ii) 67% or more of the
outstanding shares of the Trust or the Fund or class, as applicable, present at
a meeting at which holders of more than 50% of the outstanding shares of the
Trust or the Fund or class, as applicable, are represented in person or by
proxy). Except with respect to the Fund's policy on borrowing and investing in
illiquid securities, these investment restrictions and policies are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy. In the
event of a violation of nonfundamental investment policy (1), the Fund will
reduce the percentage of its assets invested in
Part I -- 1
<PAGE> 402
illiquid investments in due course, taking into account the best interests of
shareholders.
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933
in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (excluding Options, Options on
Futures Contracts, Options on Stock Indices, Options on Foreign Currency
and any other type of option, Futures Contracts, any other type of futures
contract, and Forward Contracts) in the ordinary course of its business.
The Fund reserves the freedom of action to hold and to sell real estate,
mineral leases, commodities or commodity contracts (including Options,
Options on Futures Contracts, Options on Stock Indices, Options on Foreign
Currency and any other type of option, Futures Contracts, any other type
of futures contract, and Forward Contracts) acquired as a result of the
ownership of securities;
(4) issue any senior securities except as permitted by the Investment Company
Act of 1940, as amended (the "1940 Act"). For purposes of this
restriction, collateral arrangements with respect to any type of option
(including Options on Futures Contracts, Options, Options on Stock Indices
and Options on Foreign Currencies), short sale, Forward Contracts, Futures
Contracts, any other type of futures contract, and collateral arrangements
with respect to initial and variation margin, are not deemed to be the
issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue
of debt securities, the lending of portfolio securities, or the investment
of the Fund's assets in repurchase agreements shall not be considered the
making of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities
of issuers whose principal business activities are in the same industry
(except obligations issued or guaranteed by the U.S. Government or its
agencies and instrumentalities and repurchase agreements collateralized by
such obligations).
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 for the purpose of exercising control or management;
(3) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross assets.
For purposes of this restriction, collateral arrangements with respect to
any type of option (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any short
sale, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(4) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry; or
(5) with respect to 75% of its total assets, (i) purchase more than 10% of the
outstanding voting securities of any one issuer; or (ii) purchase
securities of any issuer if as a result more than 5% of the Fund's total
assets would be invested in that issuer's securities. This limitation does
not apply to obligations of the U.S. Government or its agencies or
instrumentalities.
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for the two years ended August 31, 1999,
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 -- 2
<PAGE> 403
- -------------------
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 and President (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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director.
Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor. Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer. Address: 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: Boston,
Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
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);
Cambridge Nutraceuticals (professional nutritional products), Chief Executive
Officer. Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to June, 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director. Address:
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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------------------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS 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.), an indirect subsidiary of Sun Life Assurance Company of Canada.
Part I -- A-1
<PAGE> 404
- -------------------
PART I - APPENDIX B
- -------------------
TRUSTEE COMPENSATION
While the Fund pays the compensation of non-interested Trustees and of Trustees
who are not officers of the Trust, the Trustees are currently waiving their
rights 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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT
BENEFIT TOTAL
TRUSTEE ACCRUED ESTIMATED TRUSTEE FEES
FEES AS PART OF CREDITED FROM FUND AND
FROM FUND YEARS OF FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $0 $0 5 $259,430
Marshall N. Cohan 0 0 5 143,259
Lawrence H. Cohn, M.D. 0 0 15 153,579
The Hon. Sir J. David Gibbons, KBE 0 0 5 130,059
Abby M. O'Neill 0 0 6 130,059
Walter E. Robb, III 0 0 5 171,154
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 0 0 17 157,714
Ward Smith 0 0 9 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ended August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- --------------------------------------------------
<S> <C> <C> <C> <C>
$ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
- -------------------------------
(4) Other funds in the MFS Fund complex provide retirement benefits to the
Trustees. The fees for the Fund are currently being waived by the Trustees.
Part I -- B-1
<PAGE> 405
- -------------------
PART I - APPENDIX C
- -------------------
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $196,720 $ 0 $2,553 $21,829 $ 0 $221,102
August 31, 1998 41,217 0 599 4,776 0 46,592
August 31, 1997 0 14,026 168* 0 1,819 168
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 406
- -------------------
PART I - APPENDIX D
- -------------------
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $200,467 $28,793 $171,674 $71 $11,084 $1,873
August 31, 1998 57,657 9,682 47,975 0 0 581
August 31, 1997 0 0 0 0 0 0
</TABLE>
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>
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
<S> <C>
- ---------------------------------------------------------------------------
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, 1999, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $34,736 $11,930 $22,806
Class B Shares 67,301 50,520 16,781
Class C Shares 19,215 1 19,214
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE> 407
- -------------------
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $151,029
August 31, 1998 34,202
August 31, 1997 22,757
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- --------------------------------------------------------------
<S> <C>
None
</TABLE>
Part I -- E-1
<PAGE> 408
- -------------------
PART I - APPENDIX F
- -------------------
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 30, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares, not including 82,554 Class
I shares of the Fund (which represent approximately 98% 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 September 30, 1999, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
...........................................................................................
<S> <C>
Wachovia Securities, Inc. 11.61% of Class C shares
FBO 201-12908-10
P.O. Box 1220
Charlotte, NC 28201-1220
...........................................................................................
TRS MFS DEF Contribution Plan 98.87% of Class I shares
c/o Mark Leary
Mass Financial Services
500 Boylston Street
Boston, MA 02115-3740
...........................................................................................
</TABLE>
Part I -- F-1
<PAGE> 409
- -------------------
PART I - APPENDIX G
- -------------------
PERFORMANCE INFORMATION
................................................................................
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
-------------- (INCLUDING (WITHOUT ANY Distribution
1 YEAR LIFE* WAIVERS) WAIVERS) RATE+
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (5.75%) 16.43% 11.19% N/A N/A N/A
Class A Shares, at net asset value 23.53% 13.70% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) 18.84% 12.42% N/A N/A N/A
Class B Shares, at net asset value 22.84% 13.33% N/A N/A N/A
Class C Shares, with CDSC (1% for
first year) 21.74% 13.30% N/A N/A N/A
Class C Shares, at net asset value 22.74% 13.30% N/A N/A N/A
Class I Shares, at net asset value 24.08% 13.97% N/A N/A N/A
</TABLE>
- -------------------------------
* From commencement of the Fund's investment operations on January 2, 1997.
+ Annualized, based upon the last distribution.
The Fund commenced investment operations on January 2, 1997 with the offering of
class A shares and class I shares, and subsequently offered class B shares and
class C shares on January 2, 1998. 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. This blended class B and class C share
performance has been adjusted to take into account the CDSC applicable to class
B and class C shares, rather than the initial sales charge (load) applicable to
class A shares. This blended performance has not been adjusted to take into
account differences in class specific operating expenses. Because operating
expenses of class B and C shares are higher than those of class A shares, this
blended class B and C share performance is higher than the performance of class
B and C shares would have been had class B and C shares been offered for the
entire period.
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
Part I -- G-1
<PAGE> 410
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
<PAGE> 411
MFS(R) STRATEGIC GROWTH FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
This Supplement describes the fund's class I shares, and it supplements certain
information in the fund's Prospectus dated January 1, 2000. 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 "Description of Share Classes" below.
1. RISK RETURN SUMMARY
PERFORMANCE TABLE. The "Performance Table" is intended to indicate some
of the risks of investing in the fund by showing changes in the fund's
performance over time. The table is supplemented as follows:
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
1 YEAR LIFE*
------ ------
<S> <C> <C>
Class I shares 45.72% 46.15%
Standard & Poor's 500 Composite Index#+ 28.58% 28.23%
Average growth fund++ 23.42% 22.24%
</TABLE>
- --------------
* Fund performance figures are for the period from the commencement of the
fund's investment operations on January 2, 1996, through December 31,
1998. Index and Lipper average returns are from January 1, 1996.
# The Standard & Poor's 500 Composite Index is a broad based unmanaged but
commonly used measure of common stock total return performance. It is
composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange, and over-the-counter market.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
The fund commenced investment operations on January 2, 1996, with the offering
of class A shares and subsequently offered 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. This blended class I share
performance has been adjusted to take into account the fact that class I shares
have no initial sales charge (load). This blended performance has not been
adjusted to take into account differences in class specific operating expenses.
Because operating expenses of class I shares are lower than those of class A
shares, the blended class I share performance is lower than the performance of
class I shares would have been had class I shares been offered for the entire
period.
2. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that
you may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
<TABLE>
<CAPTION>
<S> <C>
Management Fees....................................... 0.75%
Distribution and Service (12b-1) Fees................. 0.00%
Other Expenses(1)..................................... 0.28%
-----
Total Annual Fund Operating Expenses.................. 1.03%
</TABLE>
- -----------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. 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
- 1 -
<PAGE> 412
account these expense reductions, and are therefore higher than
the actual expenses of the fund. Had these fee reductions been taken into
account, "Total Annual Fund Operating Expenses" would be lower.
EXAMPLE OF EXPENSES. The "Example of Expenses" table is intended to help
you compare the cost of investing in the fund with the cost of investing in
other mutual funds. The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
The table is supplemented as follows:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
----------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
Class I shares $105 $328 $569 $1,259
</TABLE>
3. DESCRIPTION OF SHARE CLASSES
The "Description of Share Classes" 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).
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, on behalf of their clients (i) initially invest
at least $100,000 in class I shares of the fund or (ii) have, at the
time of purchase of class I shares, aggregate assets of at least $10
million invested in class I shares of the fund either alone or in
combination with investments in class I shares of other MFS Funds. MFD
may accept purchases that do not meet these dollar qualification
requirements if it believes, in its sole discretion, that these
requirements will be met within a reasonable period of time. Additional
investments may be made in any amount; 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.
- 2 -
<PAGE> 413
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 intended to help you understand the fund's
financial performance. It is supplemented as follows:
FINANCIAL STATEMENTS - CLASS I SHARES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
8/31/99 8/31/98 8/31/97*
---------- ---------- ------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value - beginning of period $ 18.85 $ 16.80 $ 12.08
------- ------- -------
Income from Investment Operations# -
Net investment loss sec. $ (0.08) $ (0.08) $ (0.04)
Net realized and unrealized gain on investments and
foreign currency 10.34 2.31 4.76
------- ------- -------
Total from investment operations $ 10.26 $ 2.23 $ 4.72
------- ------- -------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $ (0.75) $ (0.18) --
------- ------- -------
Net asset value - end of period $ 28.36 $ 18.85 $ 16.80
------- ------- -------
Total return 55.08% 13.32% 39.24%++
Ratios (to average net assets)/Supplemental data sec. -
Expenses## 1.03% 1.08% 0.94%+
Net investment loss (0.34)% (0.37)% (0.40)%+
Portfolio turnover 112% 56% 82%
Net assets at end of period (000 omitted) $24,849 $18,335 $13,462
</TABLE>
- ----------------------------------------
sec. 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% per annum of average daily net assets effective April 14, 1997
through August 31, 1997. To the extent actual expenses were over/under
this limitation, the net investment income per share and the ratios would
have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net investment loss $ -- $ -- $ (0.06)
Ratios (to average net assets):
Expenses## -- -- 1.14%+
Net Investment loss -- -- (0.60)%+
</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 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's expenses are
calculated without reduction for this expense offset arrangement.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000.
- 3 -
<PAGE> 414
MFS(R) STRATEGIC GROWTH FUND
SUPPLEMENT DATED JANUARY 1, 2000 TO THE CURRENT PROSPECTUS
THIS SUPPLEMENT DESCRIBES THE FUND'S CLASS J SHARES, AND IT SUPPLEMENTS CERTAIN
INFORMATION IN THE FUND'S PROSPECTUS DATED JANUARY 1, 2000. THE CAPTION HEADINGS
USED IN THIS SUPPLEMENT CORRESPOND WITH THE CAPTION HEADINGS USED IN THE
PROSPECTUS.
Class J shares are available for purchase only by Japanese investors. Class J
shares may only be offered or sold outside the United States and this supplement
does not constitute an offer of class J shares to any person who resides within
the United States.
1. EXPENSE SUMMARY
EXPENSE TABLE. The "Expense Table" describes the fees and expenses that you
may pay when you buy, redeem and hold shares of the fund. The table is
supplemented as follows:
SHAREHOLDER FEES (fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS J
-------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchase
(as a percentage of offering price)............................... 2.00%
Maximum Deferred Sales Charge (Load) (as a percentage
of original purchase price or redemption proceeds,
whichever is less)................................................ None
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees.................................................. 0.75%
Distribution and Service (12b-1) Fees............................ 1.00%
Other Expenses(1) (2)............................................ 0.28%
Total Annual Fund Operating Expenses............................. 2.03%
</TABLE>
- -----------------------
(1) The fund has an expense offset arrangement which reduces the fund's
custodian fee based upon the amount of cash maintained by the fund with its
custodian and dividend disbursing agent. 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) "Other Expenses" are estimated.
EXAMPLE OF EXPENSES. The "Example of Expenses" table is intended to help you
compare the cost of investing in the fund with the cost of investing in other
mutual funds. Class J expenses are as follows:
The example assumes that:
- You invest $10,000 in the fund for the time periods indicated
and you redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and
other distributions are
- 1 -
<PAGE> 415
reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these
assumptions your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3
----------- ------ ------
<S> <C> <C>
Class J shares $402 $824
</TABLE>
2. DESCRIPTIONS OF SHARE CLASSES
Five classes of shares of the fund currently are offered for sale, class A
shares, class B shares, class C shares, class I shares and class J shares. Class
A shares, class B shares, class C shares and class I shares are described in the
fund's prospectus and are available for purchase by the general public or by
certain institutional investors. Class J shares are described below.
CLASS J SHARES. Class J shares are offered exclusively to Japanese
investors through financial institutions in Japan. Class J shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
Sales Charge as
Percentage of:
---------------------------------
Amount of Purchase Net Amount
Offering Price Invested
-------------- ----------
<S> <C> <C>
All amounts 2.00% 2.04%
</TABLE>
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 J shares and the services provided to you by your
financial adviser. The class J annual distribution and service fees are equal to
1.00% (0.25% service fee and 0.75% distribution fee), and are paid out of the
assets of class J shares. These fees are paid to MFD by the fund, and MFD in
turns pays a portion of these fees to dealers.
3. HOW TO PURCHASE AND REDEEM SHARES
The discussion of "How to Purchase, Exchange and Redeem Shares" is supplemented
as follows:
HOW TO PURCHASE SHARES. You can establish an account by having your
financial adviser process your purchase. The minimum initial investment is one
share and there is no minimum investment with respect to subsequent purchases.
- 2 -
<PAGE> 416
HOW TO REDEEM SHARES. You may withdraw all or any portion of the value of
your account on any date the fund is open for business by selling your shares to
the fund through a dealer, who may charge you a fee. If the dealer receives your
order prior to the close of regular trading on the New York Stock Exchange and
communicates it to MFS before the close of the business on the same day, you
will receive the net asset value calculated on that day, reduced by an amount of
any income tax required to be withheld.
4. INVESTOR SERVICES AND PROGRAMS
The shareholder services, as described in the Prospectus, do not apply to
class J shares, except that shareholders will receive confirmation statements
and tax information and will receive all dividend and capital gain distributions
in cash.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 2000.
- 3 -
<PAGE> 417
[MFS(R)
STRATEGIC
GROWTH FUND]
JANUARY 1,
2000
PROSPECTUS
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
- ------------------------------------------------------------
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 OR DETERMINED WHETHER THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE IS
COMMITTING A CRIME.
<PAGE> 418
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
I Risk Return Summary................................... 1
II Expense Summary....................................... 5
III Certain Investment Strategies and Risks............... 7
IV Management of the Fund................................ 8
V Description of Share Classes.......................... 9
VI How to Purchase, Exchange and Redeem Shares........... 13
VII Investor Services and Programs........................ 17
VIII Other Information..................................... 19
IX Financial Highlights.................................. 21
Appendix A -- Investment Techniques and Practices..... A-1
</TABLE>
<PAGE> 419
I RISK RETURN SUMMARY
-- INVESTMENT OBJECTIVE
The fund's investment objective is capital appreciation. The fund's
objective may be changed without shareholder approval.
-- PRINCIPAL INVESTMENT POLICIES
The fund invests, under normal market conditions, at least 65% of its total
assets in common stocks and related securities, such as preferred stock,
bonds, warrants, or rights convertible into stock and depositary receipts
for these securities, of companies which the fund's investment adviser,
Massachusetts Financial Services Company (referred to as MFS or the
adviser), believes offer superior prospects for growth. Equity securities
may be listed on a securities exchange or traded in the over-the-counter
markets.
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 (such as
an analysis of earnings, cash flows, competitive position and management's
abilities) performed by the fund's portfolio manager and MFS' large group
of equity research analysts.
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
The fund may invest in foreign securities through which it may have
exposure to foreign currencies.
The fund has engaged and may engage in active and frequent trading to
achieve its principal investment strategies.
-- PRINCIPAL RISKS OF AN INVESTMENT
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. The share price of the fund generally changes
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.
1
<PAGE> 420
- Company Risk: Prices of securities react to the economic condition of
the company that issued the security. The fund's equity investments in an
issuer may rise and fall based on the issuer's actual and anticipated
earnings, changes in management and the potential for takeovers and
acquisitions.
- 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.
- Over-the-Counter Risk: Over-the-counter (OTC) transactions involve risks
in addition to those associated with transactions in securities traded on
exchanges. OTC listed companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in
smaller volume than exchange listed stocks. The values of these stocks
may be more volatile than exchange listed stocks, and the fund may
experience difficulty in purchasing or selling these securities at a fair
price.
- 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, and the fund may directly hold foreign currencies and
purchase and sell foreign currencies through forward exchange
contracts. 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. Certain foreign
currencies may be particularly volatile, and foreign governments may
intervene in the currency markets, causing a decline in value or
liquidity in the fund's foreign currency holdings. By entering into
forward foreign currency exchange contracts, the fund may be required
to forego the benefits of advantageous changes in exchange rates and,
in the case of forward contracts entered into for the purpose of
increasing return, the fund may sustain losses which will reduce its
gross income. Forward foreign currency exchange contracts involve the
risk that the party with which the fund enters the contract may fail
to perform its obligations to the fund.
2
<PAGE> 421
- Active or Frequent Trading Risk: The fund has engaged and 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 as compared to a fund with less
active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could
detract from the fund's performance.
- 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.
-- 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 changes in the fund's
performance over time. The performance table also shows how the fund's
performance over time compares with that of one or more broad measures of
market performance. 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. The chart and related notes do not take into account any sales
charges (loads) 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.
[EMBED Chart]
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<S> <C>
1996 42.04%
1997 50.40%
1998 45.20%
</TABLE>
3
<PAGE> 422
The total return for the fund's class A shares for the nine month period
ended September 30, 1999 was 11.25%. During the period shown in the bar
chart, the highest quarterly return was 28.32% (for the calendar quarter
ended December 31, 1998) and the lowest quarterly return was (10.34)% (for
the calendar quarter ended September 30, 1998).
PERFORMANCE TABLE
This table shows how the average annual total returns of each class of the
fund compare to a broad measure of market performance and assumes the
reinvestment of distributions.
AVERAGE ANNUAL TOTAL RETURNS AS OF DECEMBER 31, 1998
...........................................................................
<TABLE>
<CAPTION>
1 Year Life*
<S> <C> <C>
Class A shares 36.85% 43.04%
Class B shares 40.15% 44.81%
Class C shares 43.11% 45.35%
Standard & Poor's 500 Composite Index#+ 28.58% 28.23%
Average growth fund++ 23.42% 22.24%
</TABLE>
---------
* Fund performance figures are for the period from the commencement of
the fund's investment operations on January 2, 1996, through December
31, 1998. Index and Lipper average returns are from January 1, 1996.
+ Source: Standard & Poor's Micropal.
++ Source: Lipper Analytical Services, Inc.
# The Standard & Poor's 500 Composite Index is a broad based unmanaged
but commonly used measure of common stock total return performance. It
is composed of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and over-the-counter market.
Class A share performance takes into account the deduction of the 5.75%
maximum sales charge. Class B share 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 share
performance takes into account the deduction of the 1% CDSC.
The fund commenced investment operations on January 2, 1996 with the
offering of class A shares and subsequently offered 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. This blended class B and class C share
performance has been adjusted to take into account the CDSC applicable to
class B and class C shares, rather than the initial sales charge (load)
applicable to class A shares. This blended performance has not been
adjusted to take into account differences in class specific operating
expenses. Because operating expenses of class B and C shares are higher
than those of class A shares, this blended class B and C share performance
is higher than the performance of class B and C shares would have been had
class B and C shares been offered for the entire period.
4
<PAGE> 423
II EXPENSE SUMMARY
-- EXPENSE TABLE
This table describes the fees and expenses that you may pay when you buy,
redeem and hold shares of the fund.
SHAREHOLDER FEES: (fees paid directly from your investment)
...........................................................................
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price)..... 5.75% 0.00% 0.00%
Maximum Deferred Sales Charge
(Load) (as a percentage of
original purchase price or
redemption proceeds, whichever is
less)............................. See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund
assets)
..........................................................................
<TABLE>
<S> <C> <C> <C>
Management Fees........................... 0.75% 0.75% 0.75%
Distribution and Service (12b-1) Fees(2).. 0.35% 1.00% 1.00%
Other Expenses(3)......................... 0.28% 0.28% 0.28%
---- ---- ----
Total Annual Fund Operating Expenses...... 1.38% 2.03% 2.03%
</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. Had these fee
reductions been taken into account, "Total Annual Fund Operating
Expenses" would be lower.
5
<PAGE> 424
-- 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.
The examples assume that:
- You invest $10,000 in the fund for the time periods indicated and you
redeem your shares at the end of the time periods;
- Your investment has a 5% return each year and dividends and other
distributions are reinvested; and
- The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions
your costs would be:
<TABLE>
<CAPTION>
SHARE CLASS YEAR 1 YEAR 3 YEAR 5 YEAR 10
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $707 $987 $1,287 $2,137
Class B shares(1)
Assuming redemption at end of
period 606 937 1,293 2,192
Assuming no redemption 206 637 1,093 2,192
Class C shares
Assuming redemption at end of
period 306 637 1,093 2,358
Assuming no redemption 206 637 1,093 2,358
</TABLE>
---------
(1) Class B shares convert to class A shares approximately eight years
after purchase; therefore, years nine and ten reflect class A expenses.
6
<PAGE> 425
III CERTAIN INVESTMENT STRATEGIES AND RISKS
-- FURTHER INFORMATION ON INVESTMENT STRATEGIES AND RISKS
The fund may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of
the fund and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the fund may
engage, including the principal investment techniques and practices
described above, are identified in Appendix A to this Prospectus, and are
discussed, together with their risks, 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).
-- TEMPORARY DEFENSE POLICIES
In addition, 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's defensive
investment position may not be effective in protecting its value.
7
<PAGE> 426
IV 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 $122.8 billion on behalf of
approximately 4.1 million investor accounts as of November 30, 1999. As of
such date, the MFS organization managed approximately $94.5 billion of net
assets in equity funds and equity portfolios. Approximately $8.9 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 investment management and related administrative services and
facilities to the fund, including portfolio management and trade execution.
For these services the fund pays MFS an annual management fee of 0.75% of
the fund's average daily net asset value, as described under "Expense
Summary."
-- PORTFOLIO MANAGER
The fund's portfolio manager is S. Irfan Ali, a Vice President of MFS. Mr.
Ali has been employed as a portfolio manager by MFS since 1993, and has
been the fund's portfolio manager since February 24, 1999.
-- 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.
-- 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.
8
<PAGE> 427
V DESCRIPTION OF SHARE CLASSES
The fund offers class A, B and C shares through this prospectus. The fund
also offers two additional classes of shares, class I shares and class J
shares. Class I shares are made available exclusively to certain
institutional investors through a separate prospectus supplement provided
to institutional investors eligible to purchase them. Class J shares are
made available exclusively to Japanese investors through a separate
prospectus supplement provided to Japanese investors through financial
institutions in Japan.
-- 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 purchase class A shares at net asset value plus an initial sales
charge (referred to as the offering price), 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>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-----------------------------------------
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
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.
9
<PAGE> 428
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.
In addition, 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:
- 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
- the plan has not redeemed its class B shares in the MFS funds in order
to purchase class A shares under this category.
- 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
10
<PAGE> 429
- 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
-- 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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
-----------------------------------------------------------------------
<S> <C>
First 4%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and following 0%
</TABLE>
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
11
<PAGE> 430
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
appreciation or 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, which means that the CDSC will be
applied against the lesser of your direct investment or the total cost of
your shares. The applicability of a CDSC will not be affected by exchanges
or transfers of registration, except as described in the SAI.
-- 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 (0.10% distribution fee and 0.25% service fee) and 1.00% for each
of class B and class C shares (a 0.75% distribution fee and a 0.25% service
fee), 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.
12
<PAGE> 431
VI 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 by having your financial
adviser process your purchase. The minimum initial investment is $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 by having your financial adviser process your
exchange request or by contacting MFSC directly. The minimum exchange
amount is generally $1,000 ($50 for exchanges made under the automatic
exchange plan). Shares otherwise subject to a CDSC 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.
13
<PAGE> 432
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 may be subject to certain limitations and are subject to the
MFS funds' policies concerning excessive trading practices, which are
policies designed to protect the funds and their shareholders from the
harmful effect of frequent exchanges. These limitations and policies are
described below under the captions "Right to Reject or Restrict Purchase
and Exchange Orders" and "Excessive Trading Practices." 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 having your financial adviser process
your redemption or by contacting MFSC directly. The fund sends out your
redemption proceeds within seven days after your request is received in
good order. "Good order" generally means that the stock power, written
request for redemption, letter of instruction or certificate must be
endorsed by the record owner(s) exactly as the shares are registered. In
addition, you 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).
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 until the check has cleared, which may take up to 15
days from the purchase date.
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.
14
<PAGE> 433
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. MFSC may
require additional documentation for certain types of registrations and
transactions. Signature guarantees and this additional documentation shall
be accepted in accordance with policies established by MFSC, and MFSC may
make certain de minimis exceptions to these requirements.
-- OTHER CONSIDERATIONS
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS. 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. When a fund
determines that the level of exchanges on any day may be harmful to its
remaining shareholders, the fund may delay the payment of exchange proceeds
for up to seven days to permit cash to be raised through the orderly
liquidation of its portfolio securities to pay the redemption proceeds. In
this case, the purchase side of the exchange will be delayed until the
exchange proceeds are paid by the redeeming fund.
EXCESSIVE TRADING PRACTICES. The MFS funds do not permit market-timing or
other excessive trading practices. Excessive short-term (market-timing)
trading practices may disrupt portfolio management strategies and harm fund
performance. As noted above, the MFS funds reserve the right to reject or
restrict any purchase order (including exchanges) from any investor. To
minimize harm to the MFS funds and their shareholders, the MFS funds will
exercise these rights if an investor has a history of excessive trading or
if an investor's trading, in the judgment of the MFS funds, has been or may
be disruptive to a fund. In making this judgment, the MFS funds may
consider trading done in multiple accounts under common ownership or
control.
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.
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
15
<PAGE> 434
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.
16
<PAGE> 435
VII 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:
- Dividends and capital gain distributions reinvested in additional shares
(this option will be assigned if no other option is specified);
- Dividends in cash; capital gain distributions reinvested in additional
shares; or
- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value 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.
17
<PAGE> 436
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.
18
<PAGE> 437
VIII 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). The New York Stock Exchange is closed on most national
holidays and Good Friday. 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:
- the valuation time, if placed directly by you (not through a financial
adviser such as a broker or bank) to MFSC; or
- MFSC's close of business, if placed through a financial adviser, so long
as the financial adviser (or its authorized designee) 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 any
realized net capital gains) to shareholders as dividends at least annually.
-- TAX CONSIDERATIONS
The following discussion is very general. You are urged to consult your tax
adviser regarding the effect that an investment in the fund may have on
your particular tax situation.
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 distributions you receive from the fund, whether you
take the distributions in cash or
19
<PAGE> 438
reinvest them in additional shares. Distributions designated as capital
gain dividends are taxable as long-term capital gains. Other distributions
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.
Fund distributions will reduce the fund's net asset value per share.
Therefore, if 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 will
withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments that are subject to such withholding. You may be able to
arrange for a lower withholding rate under an applicable tax treaty if you
supply the appropriate documentation required by the fund. The fund is also
required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the
U.S.) who does not furnish to the fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been
subject to 30% withholding. Prospective investors should read the fund's
Account Application for additional information regarding backup withholding
of federal income tax.
TAXABILITY OF TRANSACTIONS. When you redeem, sell or exchange shares, it is
generally considered a taxable event for you. Depending on the purchase
price and the sale price of the shares you redeem, 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.
-- UNIQUE NATURE OF FUND
MFS may serve as the investment adviser to other funds which have
investment goals and principal investment policies and risks similar to
those of the fund, and which may be managed by the fund's portfolio
manager(s). While the fund may have many similarities to these other funds,
its investment performance will differ from their investment performance.
This is due to a number of differences between the funds, including
differences in sales charges, expense ratios and cash flows.
-- 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.
20
<PAGE> 439
IX 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. The fund's Annual Report is available upon request by
contacting MFSC (see back cover for address and telephone number). These
financial statements are incorporated by reference into the SAI. The fund's
independent auditors are Ernst & Young LLP.
21
<PAGE> 440
CLASS A SHARES
................................................................................
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED AUGUST 31, ENDED
----------------------------- AUGUST 31,
1999 1998 1997 1996*
- ----------------------------------------------------------------------------------
CLASS A
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data
(for a share outstanding throughout
the period):
Net asset value -- beginning of period $ 18.79 $ 16.79 $ 12.26 $ 10.00
-------- -------- ------- -------
Income from investment operations# --
Net investment income (loss)sec. $ (0.18) $ (0.14) $ (0.11) $ 0.02
Net realized and unrealized gain on
investments and foreign currency 10.29 2.32 6.67 2.24
-------- -------- ------- -------
Total from investment operations $ 10.11 $ 2.18 $ 6.56 $ 2.26
-------- -------- ------- -------
Less distributions declared to
shareholders from net realized gain
on investments and foreign currency
transactions $ (0.72) $ (0.18) (2.03) --
-------- -------- ------- -------
Net asset value -- end of period $ 28.18 $ 18.79 $ 16.79 $ 12.26
-------- -------- ------- -------
Total return+++ 54.40% 13.07% 59.54% 22.60%++
Ratios (to average net
assets)/Supplemental datasec.:
Expenses## 1.38% 1.36% 1.29% 0.44%+
Net investment income (loss) (0.69)% (0.66)% (0.82)% 0.23%+
Portfolio turnover 112% 56% 82% 104%
Net assets at end of period (000
omitted) $512,994 $168,536 $21,699 $10,145
</TABLE>
- ------------------
sec. For the periods ended August 31, 1997, and 1996, subject to reimbursement
by the fund, the investment adviser voluntarily agreed to maintain
expenses of the fund, exclusive of management and distribution fees, at
not more than 0.50% of average daily net assets. Prior to August 31, 1998,
the investment adviser and the distributor voluntarily waived a portion of
their management fee and distribution fee, respectively, for certain of
the periods indicated. If these fees had been incurred by the fund and/or
if actual expenses were over this limitation, the net investment loss per
share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Ratios (to average net assets):
Expenses## -- 1.43% 1.59% 1.84%+
Net investment loss -- (0.72)% (1.12)% (0.66)%+
</TABLE>
- ---------
* For the period from the commencement of the fund's investment operations,
January 2, 1996, through August 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The fund 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's expenses are
calculated without reduction for this expense offset arrangement.
+++ 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.
22
<PAGE> 441
CLASS B SHARES
................................................................................
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED AUGUST 31, ENDED
---------------------- AUGUST 31,
1999 1998 1997*
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data
(for a share outstanding throughout each
period):
Net asset value-beginning of period $ 18.59 $ 16.75 $ 12.53
Income from investment operations# -
Net investment losssec. $ (0.35) $ (0.28) $ (0.09)
Net realized and unrealized gain on
investments and foreign currency 10.18 2.30 4.31
-------- -------- -------
Total from investment operations $ 9.83 $ 2.02 $ 4.22
-------- -------- -------
Less distributions declared to
shareholders from net realized gain on
investments and foreign currency
transactions $ (0.67) $ (0.18) $ --
-------- -------- -------
Net asset value - end of period $ 27.75 $ 18.59 $ 16.75
-------- -------- -------
Total return 53.47% 12.12% 33.76%++
Ratios (to average net
assets)/Supplemental datasec.:
Expenses## 2.03% 2.08% 2.02%+
Net investment loss (1.34)% (1.36)% (1.46)%+
Portfolio turnover 112% 56% 82%
Net assets at end of period (000
omitted) $656,217 $196,519 $15,735
</TABLE>
- ------------------
sec. For the periods ended August 31, 1997, subject to reimbursement by the
fund, the investment adviser voluntarily agreed to maintain expenses of
the fund, exclusive of management and distribution fees, at not more than
0.50% of average daily net assets. To the extent actual expenses were over
this limitation, the net investment loss per share and the ratios would
have been:
<TABLE>
<S> <C> <C> <C>
Net investment loss $ -- $ -- $ (0.12)
Ratios (to average net assets):
Expenses## -- -- 2.51%+
Net investment loss -- -- (1.95)%+
</TABLE>
- ------------------
* For the period from the inception of Class B, April 11, 1997, through August
31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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's expenses are calculated
without reduction for this expense offset arrangement.
23
<PAGE> 442
CLASS C SHARES
................................................................................
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED AUGUST 31, ENDED
---------------------- AUGUST 31,
1999 1998 1997*
- --------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data
(for a share outstanding throughout each
period):
Net asset value -- beginning of period $ 18.63 $ 16.77 $12.53
-------- ------- ------
Income from investment operations# --
Net investment losssec. $ (0.35) $ (0.28) $(0.09)
Net realized and unrealized gain on
investments and foreign currency 10.20 2.31 4.33
-------- ------- ------
Total from investment operations $ 9.85 $ 2.03 $ 4.24
-------- ------- ------
Less distributions declared to shareholders
from net realized gain on investments and
foreign currency transactions $ (0.67) $ (0.17) $ --
-------- ------- ------
Net asset value - end of period $ 27.81 $ 18.63 $16.77
-------- ------- ------
Total return 53.40% 12.20% 33.92%++
Ratios (to average net assets)/
Supplemental datasec.:
Expenses## 2.03% 2.08% 2.04%+
Net investment loss (1.34)% (1.37)% (1.48)%+
Portfolio turnover 112% 56% 82%
Net assets at end of period (000 omitted) $185,784 $52,668 $6,048
</TABLE>
- ------------------
sec. For the periods ended August 31, 1997, subject to reimbursement by the
fund, the investment adviser voluntarily agreed to maintain expenses of
the fund, exclusive of management and distribution fees, at not more than
0.50% of average daily net assets. The investment adviser and the
distributor voluntarily waived their fees for the periods indicated. To
the extent actual expenses were over this limitation, the net investment
loss per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment loss $ -- $ -- $(0.13)
Ratios (to average net assets):
Expenses## -- -- 2.56%+
Net investment loss -- -- (1.99)%+
</TABLE>
- ------------------
* For the period from the inception of Class C, April 11, 1997, through August
31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## 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's expenses are calculated without
reduction for this expense offset arrangement.
24
<PAGE> 443
APPENDIX A GRAPHIC
-- INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the fund may engage in the following
principal and non-principal investment techniques and practices. Investment
techniques and practices which are the principal focus of the fund are also
described, together with their risks, in the Risk Return Summary of the
Prospectus. Both principal and non-principal investment techniques and
practices are described, together with their risks, in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
...........................................................................
<TABLE>
<S> <C> <C>
SYMBOLS X permitted -- not permitted
-------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Debt Securities
Asset-Backed Securities
Collateralized Mortgage Obligations
and Multiclass Pass-Through
Securities --
Corporate Asset-Backed Securities --
Mortgage Pass-Through Securities --
Stripped Mortgage-Backed Securities --
Corporate Securities X
Loans and Other Direct Indebtedness --
Lower Rated Bonds --
Municipal Bonds --
Speculative Bonds --
U.S. Government Securities X
Variable and Floating Rate Obligations --
Zero Coupon Bonds, Deferred Interest
Bonds and PIK Bonds X
Equity Securities X
Foreign Securities Exposure
Brady Bonds --
Depositary Receipts X
Dollar-Denominated Foreign Debt
Securities X
Emerging Markets X
Foreign Securities X
Forward Contracts X
Futures Contracts X
Indexed Securities X
Inverse Floating Rate Obligations --
Investment in Other Investment Companies
Open-End Funds X
Closed-End Funds X
Lending of Portfolio Securities X
</TABLE>
A-1
<PAGE> 444
INVESTMENT TECHNIQUES/PRACTICES (CONTINUED)
..............................................................................
<TABLE>
<S> <C>
Leveraging Transactions
Bank Borrowings X
Mortgage "Dollar-Roll" Transactions --
Reverse Repurchase Agreements X
Options
Options on Foreign Currencies X
Options on Futures Contracts X
Options on Securities X
Options on Stock Indices X
Reset Options X
"Yield Curve" Options X
Repurchase Agreements X
Restricted Securities X
Short Sales X
Short Sales Against the Box X
Short Term Instruments X
Swaps and Related Derivative Instruments X
Temporary Borrowings X
Temporary Defensive Positions X
Warrants X
"When-issued" Securities X
</TABLE>
A-2
<PAGE> 445
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 January 1, 2000,
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.
2 Avenue de Lafayette
Boston, MA 02111-1738
Telephone: 1-800-225-2606
Internet: http://www.mfs.com
Information about the fund (including its prospectus, SAI and shareholder
reports) can be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C., 20549-6009
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the fund are available on the Commission's Internet website at
http://www.sec.gov, and copies of this information may be obtained, upon payment
of a duplicating fee, by writing the Public Reference Section at the above
address.
The fund's Investment Company Act file number is 811-4777
MSG-1-12/99 484M 90/290/390/890
<PAGE> 446
[MFS Strategic Growth Fund LOGO]
January 1, 2000
<TABLE>
<S> <C>
[MFS 75 YEARS LOGO] STATEMENT OF ADDITIONAL
INFORMATION
A SERIES OF MFS SERIES TRUST I
500 BOYLSTON STREET, BOSTON, MA 02116
(617) 954-5000
This Statement of Additional Information, as This SAI is divided into two Parts -- Part I and
amended or supplemented from time to time (the Part II. Part I contains information that is
"SAI"), sets forth information which may be of particular to the Fund, while Part II contains
interest to investors but which is not information that generally applies to each of
necessarily included in the Fund's Prospectus the funds in the MFS Family of Funds (the "MFS
dated January 1, 2000. This SAI should be read Funds"). Each Part of the SAI has a variety of
in conjunction with the Prospectus. The Fund's appendices which can be found at the end of Part
financial statements are incorporated into this I and Part II, respectively.
SAI by reference to the Fund's most recent THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED
Annual Report to shareholders. A copy of the FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY
Annual Report accompanies this SAI. You may IF PRECEDED OR ACCOMPANIED BY A CURRENT
obtain a copy of the Fund's Prospectus and PROSPECTUS.
Annual Report without charge by contacting MFS
Service Center, Inc. (see back cover of Part II
of this SAI for address and phone number).
</TABLE>
MSG-13 12/99 600
<PAGE> 447
STATEMENT OF ADDITIONAL INFORMATION
PART I
Part I of this SAI contains information that is particular to the Fund.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I Definitions................................................. 1
II Management of the Fund...................................... 1
The Fund.................................................... 1
Trustees and Officers -- Identification and Background...... 1
Trustee Compensation........................................ 1
Affiliated Service Provider Compensation.................... 1
III Sales Charges and Distribution Plan Payments................ 1
Sales Charges............................................... 1
Distribution Plan Payments.................................. 1
IV Portfolio Transactions and Brokerage Commissions............ 1
V Share Ownership............................................. 1
VI Performance Information..................................... 1
VII Investment Techniques, Practices, Risks and Restrictions.... 1
Investment Techniques, Practices and Risks.................. 1
Investment Restrictions..................................... 1
VIII Tax Considerations.......................................... 3
IX Independent Auditors and Financial Statements............... 3
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
</TABLE>
<PAGE> 448
I DEFINITIONS
"Fund" - MFS Strategic Growth Fund, a series of the Trust. The Fund was known as
"MFS Aggressive Growth Fund" prior to April 9, 1997.
"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 January 1, 2000, as amended or
supplemented from time to time.
II 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.
III 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.
IV 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.
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 certain other MFS Funds) have directed
the Adviser to allocate a total of $53,050 of commission business from certain
MFS Funds (including the Fund) to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
V 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.
VI 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.
VII 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 A to the Prospectus, and are more fully
described, together with their associated risks, in Part II of this SAI. The
following percentage limitations apply to these investment techniques and
practices:
- - Foreign Securities Exposure may be up to (but not including) 20% of the Fund's
net assets
- - Lending of Portfolio Securities may not exceed 30% of the Fund's net assets
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
Part I -- 1
<PAGE> 449
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 the event of a violation of
nonfundamental investment policy (1), the Fund will reduce the percentage of its
assets invested in illiquid investments in due course, taking into account the
best interests of shareholders.
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 for the purpose of exercising control or management;
(3) 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;
(4) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry; or
(5) with respect to 75% of its total assets, (i) purchase more than 10% of the
outstanding voting securities of any one issuer; or (ii) purchase
securities of any issuer if as a result more than 5% of the Fund's total
assets would be invested in that issuer's securities. This limitation does
not apply to obligations of the U.S. Government or its agencies or
instrumentalities.
Part I -- 2
<PAGE> 450
VIII TAX CONSIDERATIONS
For a discussion of tax considerations, see Part II of this SAI.
IX 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, 1999, the Statement of Operations for the year ended August 31, 1999,
the Statement of Changes in Net Assets for the two years ended August 31, 1999,
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 -- 3
<PAGE> 451
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 and President (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.
Address: Boston, Massachusetts
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 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: 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: Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Chairman and Chief Executive Officer
Address: 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: Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Director 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); Cambridge Nutraceuticals (professional nutritional products), Chief
Executive Officer
Address: Boston, Massachusetts
WARD SMITH (born 9/13/30)
Retired. NACCO Industries (holding company), Chairman (prior to June 1994);
Sundstrand Corporation (diversified mechanical manufacturer), Director
Address: 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, Senior Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young LLP, Senior Tax Manager (prior to September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------------------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. 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.), an indirect subsidiary of Sun Life Assurance Company of Canada.
Part I -- A-1
<PAGE> 452
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 $1,250 per year
plus $225 per meeting and $225 per committee meeting attended, together with
such Trustee's out-of-pocket expenses.
The Board of Trustees has adopted a deferred compensation plan for disinterested
trustees that enables these Trustees to elect to defer all or a portion of the
annual fees they are entitled to receive from the Fund until a payment date
elected by the Trustee (or the Trustee's termination of service). Under the
plan, the compensation deferred by Trustees is periodically adjusted as though
an equivalent amount had been invested in shares of one or more funds in the MFS
Family of Funds designated by the Trustee. The amount paid to the Trustee on the
payment date will be determined based on the performance of the selected funds.
To the extent permitted by the 1940 Act, the Fund may invest in shares of these
other selected MFS Funds in order to match the deferred compensation obligation.
Deferral of fees in accordance with the plan will not materially affect the
Fund's assets, liabilities or net income per share. The plan will not obligate
the fund to retain the services of any Trustee or pay any particular level of
compensation to any Trustee. The plan is not funded and the Fund's obligation to
pay the Trustee's defined compensation is a general unsecured obligation. The
plan became effective on July 1, 1999.
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
................................................................................
<TABLE>
<CAPTION>
RETIREMENT
BENEFIT TOTAL
TRUSTEE ACCRUED ESTIMATED TRUSTEE FEES
FEES AS PART OF CREDITED FROM FUND AND
FROM FUND YEARS OF FUND
TRUSTEE FUND(1)(4) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,500 $306 6 $259,430
Marshall N. Cohan 3,725 351 6 143,259
Dr. Lawrence Cohn 3,788 333 16 153,579
Sir J. David Gibbons 3,500 306 6 130,059
Abby M. O'Neill 3,500 306 7 130,059
Walter E. Robb, III 4,115 393 6 171,154
Arnold D. Scott 0 0 N/A 0
Jeffrey L. Shames 0 0 N/A 0
J. Dale Sherratt 3,950 393 18 157,714
Ward Smith 3,725 363 10 146,739
</TABLE>
- -------------------------------
(1) For the fiscal year ending August 31, 1999.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1998. All Trustees served
as Trustees of 43 funds within the MFS fund complex (having aggregate net
assets at December 31, 1998, of approximately $24.9 billion) except Mr.
Bailey, who served as Trustee of 74 funds within the MFS complex (having
aggregate net assets at December 31, 1998 of approximately $68.2 billion).
(4) During the fiscal year ended August 31, 1999, Messrs. Cohn and Robb deferred
$300.61 and $198.40, respectively, of his compensation pursuant to the
deferred compensation plan.
Part I -- B-1
<PAGE> 453
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(5)
................................................................................
<TABLE>
<CAPTION>
Years of Service
AVERAGE
TRUSTEE FEES 3 5 7 10 OR MORE
- ----------------------------------------------------
<S> <C> <C> <C> <C>
$2,205 $331 $ 551 $ 772 $1,103
2,669 400 667 934 1,335
3,134 470 783 1,097 1,567
3,598 540 899 1,259 1,799
4,062 609 1,016 1,422 2,031
4,527 679 1,132 1,584 2,263
</TABLE>
- -------------------------------
(5) Other funds in the MFS Fund complex provide similar retirement benefits to
the Trustees.
Part I -- B-2
<PAGE> 454
PART I - APPENDIX C
AFFILIATED SERVICE PROVIDER COMPENSATION
................................................................................
The Fund paid compensation to its affiliated service providers over the
specified periods as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PAID TO MFS AMOUNT PAID TO MFS FOR PAID TO MFSC AMOUNT AGGREGATE
FOR ADVISORY WAIVED ADMINISTRATIVE FOR TRANSFER WAIVED AMOUNT PAID
SERVICES BY MFS SERVICES AGENCY SERVICES BY MFSC TO MFS AND MFSC
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $7,076,430 $0 $125,268 $996,099 $0 $8,197,797
August 31, 1998 1,898,993 0 36,964 291,036 0 2,226,993
August 31, 1997 146,570 0 1,974* 17,935 0 166,479
</TABLE>
- -------------------------------
* From March 1, 1997, the commencement of the Master Administrative Service
Agreement.
Part I -- C-1
<PAGE> 455
PART I - APPENDIX D
SALES CHARGES AND DISTRIBUTION PLAN PAYMENTS
SALES CHARGES
................................................................................
The following sales charges were paid during the specified periods:
<TABLE>
<CAPTION>
Class A Initial Sales Charges: CDSC Paid to MFD on:
RETAINED REALLOWED CLASS A CLASS B CLASS C
FISCAL YEAR END TOTAL BY MFD TO DEALERS SHARES SHARES SHARES
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1999 $6,707,215 $947,877 $5,759,338 $21,759 $891,029 $68,909
August 31, 1998 3,963,072 581,154 3,381,918 21,300 106,839 11,271
August 31, 1997 322,213 46,851 275,362 12 403 437
</TABLE>
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>
<CAPTION>
DEALER REALLOWANCE AS A
AMOUNT OF PURCHASE PERCENT OF OFFERING PRICE
<S> <C>
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, 1999, the Fund made the following
Distribution Plan payments:
<TABLE>
<CAPTION>
AMOUNT OF DISTRIBUTION AND SERVICE FEES:
CLASS OF SHARES PAID BY FUND RETAINED BY MFD PAID TO DEALERS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Shares $1,225,522 $ 410,927 $ 814,595
Class B Shares 4,442,942 3,335,156 1,107,786
Class C Shares 1,243,558 780 1,242,778
</TABLE>
Distribution plan payments retained by MFD are used to compensate MFD for
commissions advanced by MFD to dealers upon sale of fund shares.
Part I -- D-1
<PAGE> 456
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:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEAR END PAID BY FUND
- -------------------------------------------------------------
<S> <C>
August 31, 1999 $ 2,182,708
August 31, 1998 661,238
August 31, 1997 52,060
</TABLE>
SECURITIES ISSUED BY REGULAR BROKER-DEALERS
................................................................................
During the fiscal year ended August 31, 1999, the Fund purchased securities
issued by the following regular broker-dealers of the Fund, which had the
following values as of August 31, 1999:
<TABLE>
<CAPTION>
VALUE OF SECURITIES
BROKER-DEALER AS OF AUGUST 31, 1999
- -------------------------------------------------------------
<S> <C>
Chase Manhattan $ 2,493,887
CIT Group, Inc. 63,508
Citi Group 13,751,184
Goldman Sachs 370,838
Morgan Stanley Dean Witter 9,905,938
</TABLE>
Part I -- E-1
<PAGE> 457
PART I - APPENDIX F
SHARE OWNERSHIP
OWNERSHIP BY TRUSTEES AND OFFICERS
As of September 30, 1999, the Trustees and officers of the Trust as a group
owned less than 1% of any class of the Fund's shares, not including 848,744
Class I shares of the Fund (which represent approximately 96% 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 September 30, 1999, and are
therefore presumed to control the Fund:
<TABLE>
<CAPTION>
JURISDICTION OF ORGANIZATION
NAME AND ADDRESS OF INVESTOR (IF A COMPANY) PERCENTAGE OWNERSHIP
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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 September 30, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTOR
OWNERSHIP PERCENTAGE
...........................................................................................
<S> <C>
MLPF&S for the Sole Benefit of its Customers 7.71% 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 13.63% of Class C shares
Attn: Fund Administration 97N52
4800 Deer Lake Drive E 3rd FL
Jacksonville, FL 32246-6484
...........................................................................................
TRS MFS DEF Contribution Plan 87.98% of Class I shares
c/o Mark Leary 19th FL
Mass Financial Services
500 Boylston Street
Boston, MA 02116-3740
...........................................................................................
TRS MFS 401(k) Plan 8.36% of Class I shares
c/o Mark Leary
500 Boylston Street
19th Floor
Boston, MA 02116-3740
...........................................................................................
</TABLE>
Part I -- F-1
<PAGE> 458
PART I - APPENDIX G
PERFORMANCE INFORMATION
................................................................................
All performance quotations are as of August 31, 1999.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ACTUAL 30-
TOTAL RETURNS DAY YIELD 30-DAY YIELD CURRENT
----------------------- (INCLUDING (WITHOUT ANY Distribution
1 YEAR LIFE OF FUND* WAIVERS) WAIVERS) RATE+
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares, with initial sales
charge (5.75%) 45.52% 37.59% N/A N/A N/A
Class A Shares, at a net asset value 54.40% 39.83% N/A N/A N/A
Class B Shares, with CDSC (declining
over 6 years from 4% to 0%) 49.47% 38.85% N/A N/A N/A
Class B Shares, at net asset value 53.47% 39.19% N/A N/A N/A
Class C Shares, with CDSC (1% for
first year) 52.40% 39.25% N/A N/A N/A
Class C Shares, at net asset value 53.40% 39.25% N/A N/A N/A
Class I Shares, at net asset value 55.08% 40.13% N/A N/A N/A
Class J Shares, with initial sales
charge (2.00%)** N/A N/A N/A N/A N/A
Class J Shares, at net asset
value** N/A N/A N/A N/A N/A
</TABLE>
- -------------------------------
* From the commencement of the fund's investment operations on January 2, 1996.
** Class J shares were not available at August 31, 1999.
+ Annualized, based upon the last distribution.
The Fund commenced investment operations on January 2, 1996, with the offering
of class A shares and subsequently offered class B shares and class C shares on
April 11, 1997, and class I shares on January 2, 1997. Class B, C and I share
performance include the performance of the Fund's class A shares for periods
prior to the offering of class B, C and I shares. The blended class B and class
C share performance has been adjusted to take into account the CDSC applicable
to class B and class C shares, rather than the initial sales charge (load)
applicable to class A shares. The blended class I share performance has been
adjusted to take into account the fact that class I shares have no initial sales
charge (load). This blended performance has not been adjusted to take into
account differences in class specific operating expenses. Because operating
expenses of class B and C shares are higher than those of class A shares, this
blended class B and C share performance is higher than the performance of class
B and C shares would have been had class B and C shares been offered for the
entire period. Conversely, because operating expenses of class I shares are
lower than those of class A shares, the blended class I share performance is
lower than the performance of class I shares would have been had class I shares
been offered for the entire period.
Performance results include any applicable expense subsidies and waivers, which
may cause the results to be more favorable.
Part I -- G-1
<PAGE> 459
<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
I Management of the Fund .......................................... 1
Trustees/Officers ............................................... 1
Investment Adviser .............................................. 1
Administrator ................................................... 2
Custodian ....................................................... 2
Shareholder Servicing Agent ..................................... 2
Distributor ..................................................... 2
II Principal Share Characteristics ................................. 2
Class A Shares .................................................. 2
Class B Shares, Class C Shares and Class I Shares ............... 2
Waiver of Sales Charges ......................................... 3
Dealer Commissions and Concessions .............................. 3
General ......................................................... 3
III Distribution Plan ............................................... 3
Features Common to Each Class of Shares ......................... 3
Features Unique to Each Class of Shares ......................... 4
IV Investment Techniques, Practices and Risks ...................... 5
V Net Income and Distributions .................................... 5
Money Market Funds .............................................. 5
Other Funds ..................................................... 5
VI Tax Considerations .............................................. 5
Taxation of the Fund ............................................ 5
Taxation of Shareholders ........................................ 6
Special Rules for Municipal Fund Distributions .................. 7
VII Portfolio Transactions and Brokerage Commissions ................ 8
VIII Determination of Net Asset Value ................................ 9
Money Market Funds .............................................. 9
Other Funds ..................................................... 10
IX Performance Information ......................................... 10
Money Market Funds .............................................. 10
Other Funds ..................................................... 11
General ......................................................... 12
MFS Firsts ...................................................... 12
X Shareholder Services ............................................ 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-Deferred Retirement Plans ................................... 16
XI Description of Shares, Voting Rights and Liabilities ............ 17
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
Appendix D -- Description of Bond Ratings ....................... D-1
<PAGE>
I 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 (an insurance company).
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: advisory and administrative services;
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 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.
II 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 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 concessions 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.
III 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.
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.
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.
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 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.
IV 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.
V 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 amount exceeds such declared dividends at the end of
the month (or during the month in the case of an account liquidated in its
entirety), the 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.
VI 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 therefore
prospective investors are urged to consult their tax advisors about the
impact an investment in the Fund may have on their own tax situations.
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 qualify 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. As a regulated investment company, the Fund will
not be subject to any federal income or excise taxes on its net investment
income and net realized capital gains that it distributes to shareholders
in accordance with the timing requirements imposed by the Code. 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 a regular federal corporate income tax on all
of its taxable income, whether or not distributed, 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 -- Subject to the special rules discussed
below for Municipal Funds, 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. Any
distributions from ordinary income and from net short-term capital gains
are taxable to shareholders as ordinary income for federal income tax
purposes whether 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, other than dividends that are declared by the
Fund on a daily basis, 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 such 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 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.
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 on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding.
The Fund may withhold at a lower rate permitted by an applicable treaty if
the shareholder provides the documentation required by the Fund. Any
amounts overwithheld may be recovered by such persons by filing a claim
for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims.
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 generally intends to advise shareholders of the extent, if any, to
which its dividends consist of such interest. Shareholders are urged to
consult their tax advisors regarding the possible exclusion of such
portion of their dividends for state and local income tax purposes.
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 described in the next two paragraphs) 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. 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 if the Fund has state or local governments or other tax-exempt
organizations as shareholders.
OPTIONS, FUTURES CONTRACTS, AND FORWARD CONTRACTS -- The Fund's
transactions in options, Futures Contracts, Forward Contracts, short sales
"against the box," and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of
Fund income and distributions to shareholders. For example, certain
positions held by 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.
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.
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 its shareholders foreign income taxes paid by it. If the Fund
so elects, shareholders will be required to treat their pro rata portions
of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by 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 its 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.
SPECIAL RULES FOR MUNICIPAL FUND DISTRIBUTIONS The following special rules
apply to shareholders of funds whose objective is to invest primarily in
obligations that pay interest that is exempt from federal income tax
("Municipal Funds").
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 income that
is taxable (including interest from any obligations that lose their
federal tax exemption) and may 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, whether paid in cash or
reinvested in additional shares. However, the Fund does not expect that
the non-tax-exempt portion of its net investment income, if any, will be
substantial. 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, if a shareholder wishes to redeem shares of a
Municipal Fund that does not declare dividends on a daily basis, the
shareholder may wish to consider whether he or she could obtain a better
tax result by redeeming immediately after 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 facilities financed by private activity
bonds should consult their tax advisors 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.
VII 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 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.
VIII 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 oversees 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
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.
IX 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 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).
Any total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and
on changes in the expenses of the Fund. These factors and possible
differences in the methods used to calculate total rates of return should
be considered when comparing the total rate of return of the Fund to total
rates of return published for other investment companies or other
investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
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 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,
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 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, including
issues concerning social security; 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; the history of the mutual fund
industry; investor behavior; and other similar or related matters.
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.
o 1924 -- Massachusetts Investors Trust is established as the first
open-end mutual fund in America.
o 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
o 1932 -- One of the first internal research departments is established
to provide in-house analytical capability for an investment management
firm.
o 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").
o 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
o 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
o 1979 -- Spectrum becomes the first combination fixed/ variable annuity
with no initial sales charge.
o 1981 -- MFS(R) Global Governments Fund is established as America's
first globally diversified fixed-income mutual fund.
o 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.
o 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
o 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock Exchange.
o 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
o 1989 -- MFS(R) Regatta becomes America's first non-qualified market
value adjusted fixed/variable annuity.
o 1990 -- MFS(R) Global Total Return Fund is the first global balanced
fund.
o 1993 -- MFS(R) Global Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
o 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.
X 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 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 at
MFD's discretion as a single purchaser and, under the Right of
Accumulation (but not the Letter of Intent) obtain quantity sales charge
discounts on the purchase of Class A shares if the group (1) gives its
endorsement or authorization to the investment program so it may be used
by the investment dealer to facilitate solicitation of the membership,
thus effecting economies of sales effort; (2) has been in existence for at
least six months and has a legitimate purpose other than to purchase
mutual fund shares at a discount; (3) is not a group of individuals whose
sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups;
and (4) agrees to provide certification of membership of those members
investing money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of
funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder (if
available for sale). Under the Automatic Exchange Plan, exchanges of at
least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether
monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial transfer will
occur after receipt and processing by 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 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 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.
XI 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.
<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). Some of the following information
will not apply to certain funds in the MFS Family of Funds, depending on
which classes of shares are offered by such fund. 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:
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.
CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
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 or
domestic partners 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.
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.
RETIREMENT PLANS (CDSC WAIVER ONLY).
Shares redeemed on account of distributions made under the following
circumstances:
o Individual Retirement Accounts ("IRAs")
> Death or disability of the IRA owner.
o Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer
Sponsored Plans ("ESP Plans")
> Death, disability or retirement of 401(a) or ESP Plan participant;
> Loan from 401(a) or ESP Plan;
> Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
> Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
> Tax-free return of excess 401(a) or ESP Plan contributions;
> To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by MFSC (the "MFS Participant
Recordkeeping System");
> 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; and
> Shares purchased by certain retirement plans or trust accounts if:
(i) the plan is currently a party to a retirement plan
recordkeeping or administration services agreement with MFD or one
of its affiliates and (ii) the shares purchased or redeemed
represent transfers from or transfers to plan investments other
than the MFS Funds for which retirement plan recordkeeping services
are provided under the terms of such agreement.
o Section 403(b) Salary Reduction Only Plans ("SRO Plans")
> Death or disability of SRO Plan participant.
o Nonqualified deferred compensation plans (currently a party to a
retirement plan recordkeeping or administrative services agreement with
MFD or one of its affiliates)
> Eligible participant distributions, such as distributions due to
death, disability, financial hardship, retirement and termination
of employment.
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.
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:
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.
INVESTMENT BY INSURANCE COMPANY SEPARATE
ACCOUNTS
o Shares acquired by insurance company separate accounts.
RETIREMENT PLANS
o Administrative Services Arrangements
> Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
o Reinvestment of Distributions from Qualified Retirement Plans
> Shares acquired through the automatic reinvestment in Class A
shares of Class A or Class B distributions which constitute
required withdrawals from qualified retirement plans.
o Reinvestment of Redemption Proceeds from Class B Shares
> Shares acquired by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System where the
purchase represents the immediate reinvestment of proceeds from the
plan's redemption of its Class B shares of the MFS Funds and is
equal to or exceeds $500,000, either alone or in aggregate with the
current market value of the plan's existing Class A shares.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
o IRAs
> Distributions made on or after the IRA owner has attained the age
of 59 1/2 years old; and
> Tax-free returns of excess IRA contributions.
o 401(a) Plans
> Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
> Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
o ESP Plans and SRO Plans
> Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
o 401(a) Plans and ESP Plans
> where the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
> where 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.
PURCHASES OF AT LEAST $5 MILLION
(CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefit of their trust account clients.
INVESTMENT OF PROCEEDS FROM CERTAIN REDEMPTIONS OF CLASS I SHARES.
o The initial sales charge imposed on purchases of Class A shares, and
the contingent deferred sales charge imposed on certain redemptions of
Class A shares, are waived with respect to Class A shares acquired of
any of the MFS Funds through the immediate reinvestment of the proceeds
of a redemption of Class I shares of any of the MFS Funds.
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:
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.
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.
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).
RETIREMENT PLANS.
Shares redeemed on account of distributions made under the following
circumstances:
o IRAs, 401(a) Plans, ESP Plans and SRO Plans
> Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
Code rules;
> Salary Reduction Simplified Employee Pension Plans ("SAR-SEP
Plans");
> Distributions made on or after the SAR- SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules; and
> Death or disability of a SAR-SEP Plan participant.
o 401(a) and ESP Plans Only (Class B CDSC Waiver Only)
> By a retirement plan whose sponsoring organization subscribes to
the MFS Participant Recordkeeping System and which established an
account with MFSC between July 1, 1996 and December 31, 1998;
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.
> By a retirement plan whose sponsoring organization subscribes to
the MFS Recordkeeper Plus product and which established its account
with MFSC on or after January 1, 1999 (provided that the plan
establishment paperwork is received by MFSC in good order on or
after November 15, 1998). A plan with a pre-existing account(s)
with any MFS Fund which switches to the MFS Recordkeeper Plus
product will not become eligible for this waiver category.
<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.
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:
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
Except for those employer sponsored retirement plans described below, 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 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).
In the case of employer sponsored retirement plans whose account
application or other account establishment paperwork is received in good
order after December 31, 1999, purchases will be aggregated as described
above but the cumulative purchase amount will not be re-set after the date
of the first such purchase.
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 established its account with MFSC between July 1, 1996 and December
31, 1998, 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.
For purchases of Class B shares by a retirement plan whose sponsoring
organization subscribes to the MFS Recordkeeper Plus product and which has
established its account with MFSC on or after January 1, 1999 (provided that
the plan establishment paperwork is received by MFSC in good order on or
after November 15, 1998), MFD pays no up front commissions to dealers, but
instead pays an amount to dealers equal to 1% per annum of the average daily
net assets of the Fund attributable to plan assets, payable at the rate of
0.25% at the end of each calendar quarter, in arrears. This commission
structure is not available with respect to a plan with a pre-existing
account(s) with any MFS Fund which seeks to switch to the MFS Recordkeeper
Plus product.
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.
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.
<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 risks associated with
these investment techniques and practices. The Fund will engage only in
certain of these investment techniques and practices, as identified in
Appendix A of the Fund's Prospectus. Investment practices and techniques
that are not identified in Appendix A of the Fund's Prospectus do not apply
to the Fund.
INVESTMENT TECHNIQUES AND PRACTICES
DEBT SECURITIES
To the extent the Fund invests in the following types of debt securities,
its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be
expected to rise. Conversely, when interest rates rise, the value of debt
securities can be expected to decline. The Fund's investment in debt
securities with longer terms to maturity are subject to greater volatility
than the Fund's shorter-term obligations. Debt securities may have all types
of interest rate payment and reset terms, including fixed rate, adjustable
rate, zero coupon, contingent, deferred, payment in kind and auction rate
features.
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. 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 a mortgage
pass-through security generally will decline; however, when interest rates
are declining, the value of mortgage pass-through securities with prepayment
features may not increase as much as that of other fixed-income securities.
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 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.
CORPORATE SECURITIES: The Fund may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
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 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, Fitch or Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix
D for a description of bond ratings. 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.
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.
SPECULATIVE BONDS: The Fund may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P, Fitch or Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. 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.
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 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 FNMA.
U.S. Government Securities also include interests 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.
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.
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.
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.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Emerging markets include any country determined by the Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according
to the International Bank for Reconstruction and Development, the country's
foreign currency debt rating, its political and economic stability and the
development of its financial and capital markets. The Adviser determines
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for securities, the source of its revenues and the
location of its assets. Such investments entail significant risks as
described below.
o 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.
o 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.
o 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.
o 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.
o 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.
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.
o 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.
o 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. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c)
the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or
services performed in that country; or (e) the issuer has 50% or more of its
assets in that country.
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. The Fund's investments in foreign securities may
also include "privatizations." Privatizations are situations where the
government in a given country, including emerging market countries, sells
part or all of its stakes in government owned or controlled enterprises. In
certain countries, the ability of foreign entities to participate in
privatizations may be limited by local law and the terms on which the
foreign entities may be permitted to participate may be less advantageous
than those afforded local investors.
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 (e.g., 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 dollar value of portfolio securities or the increase in the dollar
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 the value date, 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.
The use by the Fund of Forward Contracts also involves the risks described
under the caption "Special Risk Factors -- Options, Futures, Forwards, Swaps
and Other Derivative 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 commodities, interest rate and foreign currency
futures contracts, the underlying commodities, 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 may allow the
Fund to hedge its interest rate risk without having to sell its portfolio
securities.
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 dollar 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, Forwards, Swaps
and Other Derivative Transactions" in this Appendix.
INDEXED SECURITIES
The Fund may purchase securities with principal and/or interest payments
whose prices are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. 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 and/or
the interest that might otherwise have been earned on the amount invested.
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
The Fund may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
OPEN-END FUNDS. The Fund may invest in open-end investment companies.
CLOSED-END FUNDS. The Fund may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the
value of such investment companies' portfolio securities.
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. The Fund would also receive a fee from the borrower
or compensation from the investment of the collateral, less a fee paid to
the borrower (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 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/dealer 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.
OPTIONS
The Fund may invest in the following types of options, which involve the
risks described under the caption "Special Risk Factors -- Options, Futures,
Forwards, Swaps and Other Derivative Transactions" in this Appendix:
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging and non-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. The use of
foreign currency options for non-hedging purposes, like the use of other
types of derivatives for such purposes, presents greater profit potential
but also significant risk of loss and could be considered speculative.
OPTIONS ON FUTURES CONTRACTS: The Fund also may purchase and write options
to buy or sell those Futures Contracts in which it may invest ("Options on
Futures Contracts") as described above under "Futures Contracts." Such
investment strategies will be used for hedging purposes and for non- hedging
purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case
of a call option, or a "short" position in the underlying Futures Contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of Futures Contracts,
such as payment of initial and variation margin deposits. In addition, the
writer of an Option on a Futures Contract, unlike the holder, is subject to
initial and variation margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same type (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
Fund'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 rather 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.
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.
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 falls or remains the same, the Fund will
realize a profit in the form of the premium received (less transaction
costs) that could offset all or a portion of any decline in the value of the
securities it owns. If the value of the index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of
any unrealized appreciation in the Fund's stock investments. By writing a
put option, the Fund assumes the risk of a decline in the index. To the
extent that the price changes of securities owned by the Fund correlate with
changes in the value of the index, writing covered put options on indices
will increase the Fund's losses in the event of a market decline, although
such losses will be offset in part by the premium received for writing the
option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a
stock index, the Fund will seek to offset a decline in the value of
securities it owns through appreciation of the put option. If the value of
the Fund's investments does not decline as anticipated, or if the value of
the option does not increase, the Fund's loss will be limited to the premium
paid for the option plus related transaction costs. The success of this
strategy will largely depend on the accuracy of the correlation between the
changes in value of the index and the changes in value of the Fund's
security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the Fund holds uninvested
cash or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or
a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially
fully invested is a form of leverage, up to the amount of the premium and
related transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on securities the
Fund owns.
The index underlying a stock index option may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based on narrower market indices, such as the Standard & Poor's 100
Index, or on indices of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included. The composition of
the index is changed periodically.
RESET OPTIONS:
In certain instances, the Fund may purchase or write 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 for a reset option written by the Fund 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. Conversely,
where the Fund purchases a reset option, it could be required to pay a
higher premium than would have been the case at the initiation 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 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 amount 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 collateral.
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 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 price of the security declines 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.
SHORT SALES AGAINST THE BOX
The Fund 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.
SHORT TERM INSTRUMENTS
The Fund may hold cash and invest in cash equivalents, such as short-term
U.S. Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Fund may enter into interest rate swaps, currency swaps and other types
of available swap agreements, including swaps on securities, commodities and
indices, and related types of derivatives, such as caps, collars and floors.
A swap is an agreement between two parties pursuant to which each party
agrees to make one or more payments to the other on regularly scheduled
dates over a stated term, based on different interest rates, currency
exchange rates, security or commodity prices, the prices or rates of other
types of financial instruments or assets or the levels of specified indices.
Under a typical swap, one party may agree to pay a fixed rate or a floating
rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the
obligations of parties are netted, with only the net amount paid by one
party to the other. All swap agreements entered into by the Fund with the
same counterparty are generally governed by a single master agreement, which
provides for the netting of all amounts owed by the parties under the
agreement upon the occurrence of an event of default, thereby reducing the
credit risk to which such party is exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Fund's exposure to the
underlying instrument, rate, asset or index. 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.
For example, the Fund may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would
agree to pay a floating rate multiplied by the same notional amount. If
interest rates rise, resulting in a diminution in the value of the Fund's
portfolio, the Fund would receive payments under the swap that would offset,
in whole or part, such diminution in value. The Fund may also enter into
swaps to modify its exposure to particular markets or instruments, such as a
currency swap between the U.S. dollar and another currency which would have
the effect of increasing or decreasing the Fund's exposure to each such
currency. The Fund might also enter into a swap on a particular security, or
a basket or index of securities, in order to gain exposure to the underlying
security or securities, as an alternative to purchasing such securities.
Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Fund may enter into other related types of over-the-counter
derivatives, such as "caps", "floors", "collars" and options on swaps, or
"swaptions", for the same types of hedging or non-hedging purposes. Caps and
floors are similar to swaps, except that one party pays a fee at the time
the transaction is entered into and has no further payment obligations,
while the other party is obligated to pay an amount equal to the amount by
which a specified fixed or floating rate exceeds or is below another rate
(multiplied by a notional amount). Caps and floors, therefore, are also
similar to options. A collar is in effect a combination of a cap and a
floor, with payments made only within or outside a specified range of prices
or rates. A swaption is an option to enter into a swap agreement. Like other
types of options, the buyer of a swaption pays a non-refundable premium for
the option and obtains the right, but not the obligation, to enter into the
underlying swap on the agreed-upon terms.
The Fund will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative 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 underlying price, rate or index level 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 would decline, 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, but
there can be no assurance that it will be able to do so.
The uses by the Fund of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Options, Futures, Forwards, Swaps and Other Derivative Transactions" in
this Appendix.
TEMPORARY BORROWINGS
The Fund may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
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.
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.
SPECIAL RISK FACTORS -- OPTIONS, FUTURES, FORWARDS, SWAPS AND OTHER
DERIVATIVE 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 derivatives, including options, Futures
Contracts, Options on Futures Contracts, Forward Contracts, swaps and other
types of derivatives 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 derivative
instruments based on an index, the portfolio will not duplicate the
components of the index, and in the case of derivative instruments on fixed
income securities, the portfolio securities which are being hedged may not
be the same type of obligation underlying such derivatives. The use of
derivatives for "cross hedging" purposes (such as a transaction in a Forward
Contract on one currency to hedge exposure to a different currency) may
involve greater correlation risks. 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.
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. 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 derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the
derivative 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 derivatives markets. In this regard, trading by
speculators in derivatives has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict, particularly
near the expiration of such instruments.
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. Furthermore, the cost of using these techniques may
make it economically infeasible for the Fund to engage in such transactions.
RISKS OF NON-HEDGING TRANSACTIONS: The Fund may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-
hedging transactions in such instruments 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. The
Fund may also enter into futures, Forward Contracts or swaps for non-hedging
purposes. For example, the Fund may enter into such a transaction as an
alternative to purchasing or selling the underlying instrument or to obtain
desired exposure to an index or market. In such instances, the Fund will be
exposed to the same economic risks incurred in purchasing or selling the
underlying instrument or instruments. However, transactions in futures,
Forward Contracts or swaps may be leveraged, which could expose the Fund to
greater risk of loss than such purchases or sales. Entering into
transactions in derivatives for other than hedging purposes, therefore,
could expose the Fund to significant risk of loss if the prices, rates or
values of the underlying instruments or indices do not move in the direction
or to the extent anticipated.
With respect to the writing of straddles on securities, the Fund incurs
the risk that the price of the underlying security will not remain stable,
that one of the options written will be exercised and that the resulting
loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Fund with two simultaneous premiums on the same security, but
involve additional risk, since the Fund may have an option exercised against
it regardless of whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary
market for such instruments on the exchange on which the initial transaction
was entered into. While the Fund will enter into options or futures
positions only if there appears to be a liquid secondary market therefor,
there can be no assurance that such a market will exist for any particular
contract at any specific time. In that event, it may not be possible to
close out a position held by the Fund, and the Fund could be required to
purchase or sell the instrument underlying an option, make or receive a cash
settlement or meet ongoing variation margin requirements. Under such
circumstances, if the Fund has insufficient cash available to meet margin
requirements, it will be necessary to liquidate portfolio securities or
other assets at a time when it is disadvantageous to do so. The inability to
close out options and futures positions, therefore, could have an adverse
impact on the Fund's ability effectively to hedge its portfolio, and could
result in trading losses.
The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price
of a contract during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option positions
and requiring traders to make additional margin deposits. Prices have in the
past moved to the daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk
of trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no
initial margin deposits) 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 exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on
the same side of the market and involving the same underlying instrument
which may be held by a single investor, whether acting alone or in concert
with others (regardless of whether such contracts are held on the same or
different exchanges or held or written in one or more accounts or through
one or more brokers). Further, the CFTC and the various contract markets
have established limits referred to as "speculative position limits" on the
maximum net long or net short position which any person may hold or control
in a particular futures or option contract. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Adviser does not believe that
these trading and position limits will have any adverse impact on the
strategies for hedging the 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 IN FOREIGN CURRENCIES AND OVER-THE-COUNTER DERIVATIVES
AND OTHER TRANSACTIONS NOT CONDUCTED ON U.S. EXCHANGES: Transactions in
Forward Contracts on foreign currencies, as well as futures and options on
foreign currencies and transactions executed on foreign exchanges, are
subject to all of the correlation, liquidity and other risks outlined above.
In addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of currencies
underlying such contracts, which could restrict or eliminate trading and
could have a substantial adverse effect on the value of positions held by
the Fund. Further, the value of such positions could be adversely affected
by a number of other complex political and economic factors applicable to
the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign
currency market is a global, 24-hour market, events could occur in that
market which will not be reflected in the forward, futures or options market
until the following day, thereby making it more difficult for the Fund to
respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make
delivery of such currencies in conformity with any U.S. or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts,
over-the-counter options on securities, swaps and other over-the-counter
derivatives 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 or
swaps entered into, until exercise, expiration or maturity. This in turn
could limit the Fund's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of
an exchange clearinghouse, and the Fund will therefore be subject to the
risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue their role as market-makers in a particular currency or
security, thereby restricting the Fund's ability to enter into desired
hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and
found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts,
Options on Futures Contracts and options on foreign currencies may be traded
on exchanges located in foreign countries. Such transactions may not be
conducted in the same manner as those entered into on U.S. exchanges, and
may be subject to different margin, exercise, settlement or expiration
procedures. As a result, many of the risks of over-the-counter trading may
be present in connection with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the
over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing
member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS: In order to
assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC- regulated
exchange only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-bona fide hedging purposes, provided that the
aggregate initial margin and premiums required to establish such non-bona
fide hedging positions does not exceed 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on any such contracts the Fund has entered into, and excluding, in
computing such 5%, the in-the-money amount with respect to an option that is
in-the-money at the time of purchase.
<PAGE>
--------------------
PART II - APPENDIX D
--------------------
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat
larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event
of adverse business, financial, or economic conditions the obligor is not
likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The C rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being continued. A C rating
will also be assigned to a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in this category
are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of
some kind appears probable. C ratings signal imminent default.
DDD, DD, D: Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the
following serve as general guidelines. DDD obligations have the highest
potential for recovery, around 90% - 100% of outstanding amounts and accrued
interest. DD indicates expected recoveries in the range of 50% - 90% and D
the lowest recovery potential, i.e. below 50%.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may
move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
<PAGE>
INVESTMENT ADVISER
MFS Investment Management(R)
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.
2 Avenue de Lafayette, Boston, MA 02111-1738
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
[logo] M F S (R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
500 Boylston Street, Boston, MA 02116
MFS-13P2 - 1/00
