<PAGE>
As filed with the Securities and Exchange Commission on March
30, 1995
1933 Act
File No. 33-7637
1940 Act
File No. 811-4775
==================================================================
==============
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
POST-EFFECTIVE AMENDMENT NO. 16
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 18
MFS SERIES TRUST II
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-
954-5000
Stephen E. Cavan, Massachusetts Financial Services
Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check
appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on March 30, 1995 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new
effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an
indefinite number of
its shares of Beneficial Interest (without par value), under the
Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice on behalf of all
of its series
for its fiscal year ended November 30, 1994 on January 30, 1995.
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------
- --------------
PROPOSED PROPOSED
NUMBER MAXIMUM MAXIMUM
OF SHARES OFFERING AGGREGATE
AMOUNT OF
TITLE OF SECURITIES BEING PRICE PER OFFERING
REGISTRATION
BEING REGISTERED REGISTERED PER SHARE PRICE
FEE
- ------------------------------------------------------------------
- --------------
Shares of Beneficial
Interest (without par value) 9,071,852 $5.54 $290,000
$100
- ------------------------------------------------------------------
- --------------
Registrant elects to calculate the maximum aggregate offering
price pursuant to
Rule 24e-2. 78,523,488 shares were redeemed during the
fiscal year ended
November 30, 1994. 69,503,982 shares were used for
reductions pursuant to
paragraph (c) of Rule 24f-2 during the current fiscal year.
9,019,506 shares is
the amount of redeemed shares used for reduction in this
Amendment. Pursuant to
Rule 457(d) under the Securities Act of 1933, the maximum public
offering price
of $5.54 per share on March 15, 1995 (based on MFS Gold & Natural
Resources Fund
Class A) is the price used as the basis for calculating the
registration fee.
While no fee is required for the 69,503,982 shares, Registrant
has elected to
register, for $100, an additional $290,000 of shares (52,346
shares at $5.54 per
share).
<PAGE>
MFS SERIES TRUST II
MFS EMERGING GROWTH FUND
MFS CAPITAL GROWTH FUND
MFS INTERMEDIATE INCOME FUND
MFS GOLD & NATURAL RESOURCES FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or
Statement of
Additional Information of the responses to the Items in Parts A
and B of Form
N-1A)
STATEMENT
OF ADDITIONAL
ITEM NUMBER
INFORMATION
FORM N-1A, PART A PROSPECTUS CAPTION
CAPTION
1 (a), (b) Front Cover Page
*
2 (a) Expense Summary
*
(b), (c) *
*
3 (a) Condensed Financial
*
Information
(b) *
*
(c) Information Concerning Shares
*
of the Fund - Performance
Information
(d) Condensed Financial Information
*
4 (a) The Fund; Investment
*
Objective and Policies
(b), (c) Investment Objective and
*
Policies
5 (a) The Fund; Management of
*
the Fund - Investment Adviser
(b) Front Cover Page; Management
*
of the Fund - Investment
Adviser;
Back Cover Page
(c) Management of the Fund -
*
Investment Adviser
<PAGE>
STATEMENT
OF ADDITIONAL
ITEM NUMBER
INFORMATION
FORM N-1A, PART A PROSPECTUS CAPTION
CAPTION
(d) Management of the Fund -
*
Investment Adviser; Back
Cover Page
(e) Management of the Fund -
*
Shareholder Servicing Agent;
Back Cover Page
(f) Expense Summary; Condensed
*
Financial Information
(g) Information Concerning Shares
*
of the Fund - Purchases
5A (a), (b), (c) **
**
6 (a) Information Concerning Shares
*
of the Fund - Description of
Shares, Voting Rights and
Liabilities; Information
Concerning Shares of the
Fund - Redemptions and
Repurchases; Information
Concerning Shares of the
Fund - Purchases; Information
Concerning Shares of the Fund -
Exchanges
(b), (c), (d) *
*
(e) Shareholder Services
*
(f) Information Concerning Shares
*
of the Fund - Distributions;
Shareholder Services -
Distribution
Options
(g) Information Concerning Shares
*
of the Fund - Tax Status;
Information Concerning Shares
of
the Fund - Distributions
7 (a) Front Cover Page;
*
Management of the Fund -
Distributor; Back Cover Page
<PAGE>
STATEMENT
OF ADDITIONAL
ITEM NUMBER
INFORMATION
FORM N-1A, PART A PROSPECTUS CAPTION
CAPTION
(b) Information Concerning Shares
*
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Net Asset Value
(c) Information Concerning Shares
*
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Shareholder Services
(d) Front Cover Page;
*
Information Concerning
Shares of the Fund -
Purchases
(e) Information Concerning Shares
*
of the Fund - Distribution
Plans;
Information Concerning Shares
of the Fund - Purchases;
Expense
Summary
(f) Information Concerning Shares
*
of the Fund - Distribution
Plans
8 (a) Information Concerning Shares
*
of the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the
Fund - Purchases
(b), (c), (d) Information Concerning Shares
*
of the Fund - Redemptions
and Repurchases
9 *
*
<PAGE>
STATEMENT
OF
ADDITIONAL
ITEM NUMBER
INFORMATION
FORM N-1A, PART B PROSPECTUS CAPTION CAPTION
10 (a), (b) * Front Cover
Page
11 * Front Cover
Page
12 * Definitions
13 (a), (b), (c) * Investment
Objective,
Policies
and Restrictions
(d) * *
14 (a), (b) * Management
of the Fund -
Trustees
and Officers
(c) * Management
of the Fund -
Trustees
and Officers;
Appendix A
15 (a) * *
(b), (c) * Management
of the Fund -
Trustees
and Officers
16 (a) Management of the Fund - Management
of the Fund -
Investment Adviser Investment
Adviser;
Management
of the Fund -
Trustees
and Officers
(b) Management of the Fund - Management
of the Fund -
Investment Adviser Investment
Adviser
(c) * *
(d) * Management
of the Fund -
Investment
Adviser
(e) * Portfolio
Transactions
and
Brokerage
Commissions
(f) Information Concerning
Distribution Plans
Shares of the Fund -
Distribution Plans
(g) * *
(h) * Management
of the Fund -
Custodian;
Independent
Accountants and
Financial
Statements;
Back Cover
Page
<PAGE>
STATEMENT
OF
ADDITIONAL
ITEM NUMBER
INFORMATION
FORM N-1A, PART B PROSPECTUS CAPTION CAPTION
(i) *
Management of the
Fund -
Shareholder
Servicing Agent
17 (a), (b), (c), *
Portfolio Transactions
(d), (e) and
Brokerage
Commissions
18 (a) Information Concerning Shares
Description of Shares,
of the Fund - Description of Voting
Rights and
Shares, Voting Rights and
Liabilities
Liabilities
(b) *
*
19 (a) Information Concerning Shares
Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares
Management of the Fund
of the Fund - Net Asset Value; -
Distributor;
Information Concerning Shares
Determination of Net
of the Fund - Purchases Asset
Value and
Performance - Net
Asset
Value
(c) *
*
20 * Tax
Status
21 (a), (b) *
Management of the
Fund -
Distributor;
Distribution Plans
(c) *
*
22 (a) *
*
(b) *
Determination of Net
Asset
Value and
Performance
23 *
Independent
Accountants and
Financial Statements
- ------------------------
* Not Applicable
** Contained in Annual Report
<PAGE>
PROSPECTUS
MFS(R) EMERGING April 1, 1995
GROWTH FUND Class A Shares of
Beneficial Interest
(A member of the MFS Family of Funds(R)) Class B Shares of
Beneficial Interest
- ------------------------------------------------------------------
- --------------
Page
- ----
1. Expense Summary
.................................................. 2
2. The Fund
.........................................................
3
3. Condensed Financial Information
.................................. 4
4. Investment Objective and Policies
................................ 4
5. Investment Techniques
............................................ 7
6. Management of the Fund
........................................... 13
7. Information Concerning Shares of the Fund
........................ 14
Purchases
..................................................... 14
Exchanges
..................................................... 19
Redemptions and Repurchases
................................... 20
Distribution Plans
............................................ 22
Distributions
................................................. 23
Tax Status
.................................................... 23
Net Asset Value
............................................... 24
Description of Shares, Voting Rights and Liabilities
.......... 24
Performance Information
....................................... 25
8. Shareholder Services
............................................. 25
Appendix
.........................................................
27
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
MFS EMERGING GROWTH FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-
5000
The investment objective of MFS Emerging Growth Fund (the "Fund")
is to provide
long-term growth of capital by investing primarily in common
stocks of small and
medium-sized companies that are early in their life cycle but
which have the
potential to become major enterprises. The Fund is a diversified
series of MFS
Series Trust II (the "Trust"), an open-end management investment
company. THE
FUND IS INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING
TO ACCEPT THE
RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL (see
"Investment Objective
and Policies"). The minimum initial investment generally is
$1,000 per account
(see "Purchases"). The Fund's investment adviser and
distributor are
Massachusetts Financial Services Company ("MFS" or the
"Adviser") and MFS Fund
Distributors, Inc. ("MFD"), respectively, both of which are
located at 500
Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY.
This Prospectus sets forth concisely the information concerning
the Trust and
Fund that a prospective investor ought to know before investing.
The Trust, on
behalf of the Fund, has filed with the Securities and Exchange
Commission (the
"SEC") a Statement of Additional Information, dated April 1,
1995, which
contains more detailed information about the Trust and the
Fund and is
incorporated into this Prospectus by reference. See page 27
for a further
description of the information set forth in the Statement
of Additional
Information. A copy of the Statement of Additional Information
may be obtained
without charge by contacting the Shareholder Servicing Agent (see
back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
SHAREHOLDER TRANSACTION EXPENSES:
<CAPTION>
CLASS A CLASS B
- ------- -------
<S>
<C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a
percentage of offering price)
......................................... 5.75%
0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original
purchase price or redemption proceeds, as applicable)
................. See Below<F1> 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees
.........................................................
0.75% 0.75%
Rule 12b-1 Fees (after applicable fee reduction)
........................ 0.25%<F2> 1.00%<F3>
Other Expenses
..........................................................
0.33% 0.39%
- ----- -----
Total Operating Expenses
................................................ 1.33%
2.14%
<FN>
- ---------
<F1> Purchases of $1 million or more are not subject to an initial
sales charge;
however, a contingent deferred sales charge (a "CDSC")
of 1% will be
imposed on such purchases in the event of certain redemption
transactions
within 12 months following such purchases (see "Purchases").
<F2> The Fund has adopted a Distribution Plan for its Class
A shares in
accordance with Rule 12b-1 under the Investment Company
Act of 1940, as
amended (the "1940 Act"), which provides that it will pay
distribution/
service fees aggregating up to (but not necessarily all of)
0.35% per annum
of the average daily net assets attributable to the Class
A shares. The
Fund's distributor is currently waiving payment of 0.10%
payable under the
Class A Distribution Plan (see "Distribution Plans"). After
a substantial
period of time distribution expenses paid under this Plan,
together with
the initial sales charge, may total more than the maximum
sales charge that
would have been permissible if imposed entirely as an initial
sales charge.
<F3> The Fund has adopted a Distribution Plan for its Class
B shares in
accordance with Rule 12b-1 under the 1940 Act, which
provides that it will
pay distribution/service fees aggregating up to 1.00%
per annum of the
average net assets attributable to the Class B shares (see
"Distribution
Plans"). After a substantial period of time, distribution
expenses paid
under this plan, together with any CDSC, may total more
than the maximum
sales charge that would have been permissible if imposed
entirely as an
initial sales charge.
</TABLE>
<TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of
expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b)
redemption at the
end of each of the time periods indicated (unless otherwise
noted):
<CAPTION>
PERIOD
CLASS A CLASS B
------
- ------- --------------------------------
<F1>
<S>
<C> <C> <C>
1 year ......................................................
$ 70 $ 62 $ 22
3 years .....................................................
97 97 67
5 years .....................................................
126 135 115
10 years .....................................................
208 227<F2> 227<F2>
<FN>
- ---------
<F1> Assumes no redemption.
<F2> Class B shares convert to Class A shares approximately
eight years after
purchase; therefore, years nine and ten reflect Class A
expenses.
</TABLE>
The purpose of the expense table above is to assist
investors in
understanding the various costs and expenses that a shareholder of
the Fund will
bear directly or indirectly. More complete descriptions of the
following Fund
expenses are set forth in the following sections: (i) varying
sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs --
"Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1
(i.e., distribution
plan) fees -- "Distribution Plans".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE
GREATER OR LESS
THAN THOSE SHOWN.
<PAGE>
2. THE FUND
The Fund is a diversified series of the Trust, an open-end
management investment
company which was organized as a business trust under the
laws of The
Commonwealth of Massachusetts on July 30, 1986. The Trust
presently consists of
four series of shares, each of which represents a portfolio
with separate
investment policies. Shares of the Fund are continuously sold to
the public and
the Fund then uses the proceeds to buy securities for its
portfolio. Two classes
of shares of the Fund currently are offered to the general
public. Class A
shares are offered at net asset value plus an initial sales charge
(or a CDSC in
the case of certain purchases of $1 million or more) and
subject to a
Distribution Plan providing for a distribution and service fee.
Class B shares
are offered at net asset value without an initial sales charge
but subject to a
CDSC and a Distribution Plan providing for a distribution fee and
a service fee
which are greater than the Class A distribution and service fee.
Class B shares
will convert to Class A shares approximately eight years after
purchase.
The Trust's Board of Trustees provides broad supervision over the
affairs of the
Fund. The Adviser is responsible for the management of the Fund's
assets and the
officers of the Trust are responsible for the Fund's
operations. The Adviser
manages the portfolio from day to day in accordance with the
Fund's investment
objective and policies. A majority of the Trustees are not
affiliated with the
Adviser. The selection of investments and the way they are managed
depend on the
conditions and trends in the economies of the various countries
of the world,
their financial markets and the relationship of their
currencies to the U.S.
dollar. The Fund also offers to buy back (redeem) its
shares from its
shareholders at any time at net asset value, less any applicable
CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with
the financial
statements included in the Fund's Annual Report to
shareholders which are
incorporated by reference into the Statement of Additional
Information in
reliance upon the report of Deloitte & Touche LLP, independent
certified public
accountants, as experts in accounting and auditing.
<TABLE>
FINANCIAL HIGHLIGHTS
Class A and Class B shares
YEAR ENDED NOVEMBER 30,
-----------------------------------------
- ------------------------------------------------------------------
1994 1993<F2> 1994 1993
1992 1991 1990 1989 1988 1987<F1>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
CLASS A
CLASS B
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT
EACH PERIOD):
Net asset value --
beginning of period $17.68 $16.43 $17.64
$14.93 $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97 $ 5.50
------ ------ ------ -----
- - ------ ------ ------ ------ ------ ------
Income from investment
operations --
Net investment loss $(0.20)<F5> $(0.03) $(0.35)<F5>
$(0.33) $(0.07) $(0.13) $(0.14) $(0.13) $(0.11) $(0.06)
Net realized and
unrealized gain
(loss) on investments 1.78<F5> 1.28 1.78<F5>
3.19 3.52 5.31 (0.66) 1.91 1.05 (0.47)
------ ------ ------ -----
- - ------ ------ ------ ------ ------ ------
Total from investment
operations $ 1.58 $ 1.25 $ 1.43 $
2.86 $ 3.45 $ 5.18 $(0.80) $ 1.78 $ 0.94 $(0.53)
------ ------ ------ -----
- - ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders from net
realized gain on
investments $(0.53) $ -- $(0.50)
$(0.15) $(0.59) $ -- $ -- $ -- $ -- $ --
------ ------ ------ -----
- - ------ ------ ------ ------ ------ ------
Net asset value - end of
period $18.73 $17.68 $18.57
$17.64 $14.93 $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97
====== ====== ======
====== ====== ====== ====== ====== ====== ======
Total return<F4> 9.06% 38.98%<F3> 8.21%
19.36% 29.25% 75.18% (10.40)% 30.12% 18.91%
(10.44)%<F3>
RATIOS (TO AVERAGE DAILY NET ASSETS)/SUPPLEMENT DATA:
Expenses 1.33%<F6> 1.19%<F3> 2.14% 2.19%
2.33% 2.50% 2.75% 2.81% 2.30% 2.40%<F3>
Net investment loss (1.09)%<F6>(0.98)%<F3> (1.90)% (1.61)%
(2.00)% (1.98)% (1.86)% (1.91)% (1.65)% (1.50)%<F3>
PORTFOLIO TURNOVER 39% 58% 39% 58%
59% 112% 86% 95% 57% 81%
NET ASSETS AT END OF
PERIOD
(000,000 OMITTED) $470 $371 $769 $602
$357 $145 $73 $82 $61 $50
<FN>
- ---------
<F1> For the period from the commencement of investment
operations, December 29,
1986 to November 30, 1987.
<F2> For the period from the date of issue of Class A shares,
September 13, 1993
to November 30, 1993.
<F3> Annualized.
<F4> Total returns for Class A shares do not include the sales
charge. If the
charge had been included, the results would have been lower.
<F5> Per share data for the periods indicated is based on
average shares
outstanding.
<F6> The distributor did not impose a portion of its Class A
distribution fee
for the period indicated. If this fee had been incurred by
the Fund, the
ratios of expenses to average net assets and net investment
loss to average
net assets would have been 1.43% and 1.19%,
respectively. The net
investment loss per share would have been $0.22.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide long-term growth of capital. Dividend
and interest
income from portfolio securities, if any, is incidental to the
Fund's investment
objective of long-term growth of capital.
The Fund's policy is to invest primarily (i.e., at least 80% of
its assets under
normal circumstances) in common stocks of small and medium-sized
companies that
are early in their life cycle but which have the potential to
become major
enterprises (emerging growth companies). Such companies
generally would be
expected to show earnings growth over time that is well above the
growth rate of
the overall economy and the rate of inflation, and would have
the products,
management and market opportunities which are usually necessary
to become more
widely recognized as growth companies.
However, the Fund may also invest in more established companies
whose rates of
earnings growth are expected to accelerate because of special
factors, such as
rejuvenated management, new products, changes in consumer
demand, or basic
changes in the economic environment.
While the Fund will invest primarily in common stocks, the
Fund may, to a
limited extent, seek appreciation in other types of securities
such as foreign
or convertible securities and warrants when relative values make
such purchases
appear attractive either as individual issues or as types of
securities in
certain economic environments (see "Additional Information as
to Investment
Objective and Policies -- Additional Risk Factors" and "--
Risk Factors
Regarding Lower Rated Securities" below). The Fund may also
enter into forward
foreign currency exchange contracts for the purchase or sale of
foreign currency
for hedging purposes and non-hedging purposes, including
transactions entered
into for the purpose of profiting from anticipated changes in
foreign currency
exchange rates, as well as options on foreign currencies
(see "Investment
Techniques --Forward Contracts on Foreign Currency" and "--
Options on Foreign
Currencies" below). The Fund may also hold foreign currency
(see "Additional
Risk Factors" below). The Fund may invest up to 25% (and expects
generally to
invest between 0% to 10%) of its total assets in foreign
securities (not
including American Depositary Receipts ("ADRs")), which may be
traded on foreign
exchanges (see "Investment Techniques -- Foreign Securities"
below). The Fund
may also invest in emerging market securities (see "Investment
Techniques --
Emerging Market Securities" below). The Fund may hold cash
equivalents or other
forms of debt securities as a reserve for future purchases of
common stock or to
meet liquidity needs.
The Fund may invest in corporate asset-backed securities
(see "Investment
Techniques -- Corporate Asset-Backed Securities" below). The
Fund may write
covered call and put options and purchase call and put options on
securities and
stock indices in an effort to increase current income and for
hedging purposes
(see "Investment Techniques -- Options" below). The Fund may
also purchase and
sell stock index futures contracts and may write and purchase
options thereon
for hedging purposes and for non-hedging purposes, subject to
applicable law
(see "Investment Techniques -- Futures Contracts and
Options on Futures
Contracts" below). In addition, the Fund may purchase portfolio
securities on a
"when-issued" or on a "forward delivery" basis (see "Investment
Techniques --
When-Issued Securities" below). The Fund may also invest a portion
of its assets
in "loan participations" (see "Investment Techniques -- Loan
Participations"
below).
While it is not generally the Fund's policy to invest or trade
for short-term
profits, the Fund may dispose of a portfolio security whenever the
Adviser is of
the opinion that such security no longer has an appropriate
appreciation
potential or when another security appears to offer
relatively greater
appreciation potential. Subject to tax requirements, portfolio
changes are made
without regard to the length of time a security has been held, or
whether a sale
would result in a profit or loss.
The nature of investing in emerging growth companies involves
greater risk than
is customarily associated with investments in more
established companies.
Emerging growth companies often have limited product lines,
markets or financial
resources, and they may be dependent on one-person management. The
securities of
emerging growth companies may have limited marketability and may
be subject to
more abrupt or erratic market movements than securities of
larger, more
established growth companies or the market averages in general.
Shares of the
Fund, therefore, are subject to greater fluctuation in value
than shares of a
conservative equity fund or of a growth fund which invests
entirely in proven
growth stocks.
ADDITIONAL INFORMATION AS TO INVESTMENT OBJECTIVE AND POLICIES
RISK FACTORS REGARDING LOWER RATED SECURITIES -- The Fund
may invest to a
limited extent in lower-rated fixed income securities or
comparable unrated
securities. Investments in lower-rated fixed income securities,
while generally
providing greater income and opportunity for gain than
investments in higher
rated securities, usually entail greater risk of principal and
income (including
the possibility of default or bankruptcy of the issuers of such
securities), and
involve greater volatility of price (especially during
periods of economic
uncertainty or change) than investments in higher rated
securities. Because
yields may vary over time, no specified level of income can ever
be assured. In
particular, securities rated lower than Baa by Moody's Investors
Service, Inc.
("Moody's") or BBB by Standard & Poor's Ratings Group
("S&P") or by Fitch
Investor Services, Inc. ("Fitch") or comparable unrated
securities (commonly
known as "junk bonds") are considered speculative. These
lower rated high
yielding fixed income securities generally tend to reflect
economic changes (and
the outlook for economic growth), short-term corporate and
industry developments
and the market's perception of their credit quality (especially
during times of
adverse publicity) to a greater extent than higher rated
securities which react
primarily to fluctuations in the general level of interest rates
(although these
lower rated fixed income securities are also affected by
changes in interest
rates). In the past, economic downturns or an increase in
interest rates have
under certain circumstances caused a higher incidence of default
by the issuers
of these securities and may do so in the future, especially
in the case of
highly leveraged issuers. During certain periods, the higher
yields on the
Fund's lower rated high yielding fixed income securities are
paid primarily
because of the increased risk of loss of principal and income,
arising from such
factors as the heightened possibility of default or bankruptcy of
the issuers of
such securities. Due to the fixed income payments of these
securities, the Fund
may continue to earn the same level of interest income while its
net asset value
declines due to portfolio losses, which could result in an
increase in the
Fund's yield despite the actual loss of principal. The
prices for these
securities may be affected by legislative and regulatory
developments. For
example, federal rules require that savings and loan
associations gradually
reduce their holdings of high-yield securities. An effect of
such legislation
may be to depress the prices of outstanding lower rated high
yielding fixed
income securities. Changes in the value of securities
subsequent to their
acquisition will not affect cash income or yield to maturity
to the Fund but
will be reflected in the net asset value of shares of the Fund.
The market for
these lower rated fixed income securities may be less liquid than
the market for
investment grade fixed income securities. Furthermore, the
liquidity of these
lower rated securities may be affected by the market's
perception of their
credit quality. Therefore, the Adviser's judgment may at times
play a greater
role in valuing these securities than in the case of
investment grade fixed
income securities, and it also may be more difficult during
times of certain
adverse market conditions to sell these lower rated securities
at their fair
value to meet redemption requests or to respond to changes in
the market. No
minimum rating standard is required by the Fund. To the extent
the Fund invests
in these lower rated fixed income securities, the achievement of
its investment
objective may be more dependent on the Adviser's own credit
analysis than in the
case of a fund investing in higher quality bonds. While the
Adviser may refer to
ratings issued by established credit rating agencies, it is not a
policy of the
Fund to rely exclusively on ratings issued by these agencies,
but rather to
supplement such ratings with the Adviser's own independent and
ongoing review of
credit quality.
The Fund may also invest in fixed income securities rated Baa by
Moody's or BBB
by S&P and Fitch and comparable unrated securities. These
securities, while
normally exhibiting adequate protection parameters, may
have speculative
characteristics and changes in economic conditions and other
circumstances are
more likely to lead to a weakened capacity to make principal
and interest
payments than in the case of higher grade fixed income securities.
ADDITIONAL RISK FACTORS -- The net asset value of the shares
of an open-end
investment company which may invest to a limited extent in
fixed income
securities changes as the general levels of interest rates
fluctuate. When
interest rates decline, the value of a fixed income portfolio can
be expected to
rise. Conversely, when interest rates rise, the value of a
fixed income
portfolio can be expected to decline.
Although changes in the value of securities subsequent to their
acquisition are
reflected in the net asset value of shares of the Fund, such
changes will not
affect the income received by the Fund from such securities.
However, the
dividends paid by the Fund, if any, will increase or decrease in
relation to the
income received by the Fund from its investments, which would
in any case be
reduced by the Fund's expenses before it is distributed to
shareholders.
In addition, the use of options, futures contracts,
options on futures
contracts, forward contracts and options on foreign currencies
(see "Investment
Techniques" below) may result in the loss of principal,
particularly where such
instruments are traded for other than hedging purposes (e.g., to
enhance current
yield).
The portfolio of the Fund is aggressively managed and, therefore,
the value of
its shares is subject to greater fluctuation and investments
in its shares
involve the assumption of a higher degree of risk than would be
the case with an
investment in a conservative equity fund or a growth fund
investing entirely in
proven growth equities.
As a result of its investments in foreign securities, the
Fund may receive
interest or dividend payments, or the proceeds of the sale or
redemption of such
securities, in the foreign currencies in which such securities
are denominated.
In that event, the Fund may promptly convert such currencies into
dollars at the
then current exchange rate. Under certain circumstances, however,
such as where
the Adviser believes that the applicable exchange rate is
unfavorable at the
time the currencies are received or the Adviser anticipates,
for any other
reason, that the exchange rate will improve, the Fund may hold
such currencies
for an indefinite period of time.
In addition, the Fund may be required to receive delivery
of the foreign
currency underlying forward foreign currency contracts it has
entered into. This
could occur, for example, if an option written by the Fund is
exercised or the
Fund is unable to close out a forward contract. The Fund may
hold foreign
currency in anticipation of purchasing foreign securities. The
Fund may also
elect to take delivery of the currencies underlying options or
forward contracts
if, in the judgment of the Adviser, it is in the best interest of
the Fund to do
so. In such instances as well, the Fund may promptly convert
the foreign
currencies to dollars at the then current exchange rate, or
may hold such
currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take
advantage of
favorable movements in the applicable exchange rate, it also
exposes the Fund to
risk of loss if such rates move in a direction adverse to the
Fund's position.
Such losses could reduce any profits or increase any losses
sustained by the
Fund from the sale or redemption of securities, and could
reduce the dollar
value of interest or dividend payments received. In addition,
the holding of
currencies could adversely affect the Fund's profit or loss on
currency options
or forward contracts, as well as its hedging strategies.
See the Statement of Additional Information for further
discussion of foreign
securities and the holding of foreign currency as well as the
associated risks.
Given the above average investment risk inherent in the Fund,
investment in
shares of the Fund should not be considered a complete
investment program and
may not be appropriate for all investors.
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES -- During
periods of unusual
market conditions when the Adviser believes that investing
for defensive
purposes is appropriate, or in order to meet anticipated
redemption requests, a
large portion or all of the assets of the Fund may be invested
in cash or cash
equivalents including, but not limited to, obligations of banks
with assets of
$1 billion or more (including certificates of deposit, bankers'
acceptances and
repurchase agreements), commercial paper, short-term notes,
obligations issued
or guaranteed by the U.S. Government or any of its agencies,
authorities or
instrumentalities and related repurchase agreements. U.S.
Government securities
also include interests in trusts or other entities representing
interests in
obligations that are issued or guaranteed by the U.S. Government,
its agencies,
authorities or instrumentalities. See the Appendix to this
Prospectus for a
description of U.S. Government obligations and certain short-term
investments.
5. INVESTMENT TECHNIQUES
LENDING OF SECURITIES: The Fund may make loans of its portfolio
securities. Such
loans will usually be made only to member banks of the Federal
Reserve System
and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the
"Exchange") and would be required to be secured continuously by
collateral in
cash, cash equivalents or U.S. Government securities
maintained on a current
basis at an amount at least equal to the market value of the
securities loaned.
The Fund would continue to collect the equivalent of the
interest on the
securities loaned and would also receive either interest (through
investment of
cash collateral) or a fee (if the collateral is U S.
Government securities).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase
agreements in order to
earn additional income on available cash or as a temporary
defensive measure.
Under a repurchase agreement, the Fund acquires securities
subject to the
seller's agreement to repurchase at a specified time and price.
If the seller
becomes subject to a proceeding under the bankruptcy laws or
its assets are
otherwise subject to a stay order, the Fund's right to liquidate
the securities
may be restricted (during which time the value of the securities
could decline).
As discussed in the Statement of Additional Information, the
Fund has adopted
certain procedures which are intended to minimize any such risk.
RESTRICTED SECURITIES: The Fund may also purchase securities
that are not
registered under the Securities Act of 1933, as amended (the
"1933 Act")
("restricted securities"), including those that can be
offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933
Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based
upon a continuing
review of the trading markets for the specific Rule 144A security,
whether such
security is illiquid and thus subject to the Fund's limitation on
investing not
more than 15% of its net assets in illiquid investments, or
liquid and thus not
subject to such limitation. The Board of Trustees has adopted
guidelines and
delegated to the Adviser the daily function of determining and
monitoring the
liquidity of Rule 144A securities. The Board, however, will
retain sufficient
oversight and be ultimately responsible for the determinations.
The Board will
carefully monitor the Fund's investments in Rule 144A
securities, focusing on
such important factors, among others, as valuation, liquidity
and availability
of information. This investment practice could have the effect of
increasing the
level of illiquidity in the Fund to the extent that qualified
institutional
buyers become for a time uninterested in purchasing Rule 144A
securities held in
the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in
illiquid investments, the Fund may also invest in restricted
securities that may
not be sold under Rule 144A, which presents certain risks. As a
result, the Fund
might not be able to sell these securities when the Adviser
wishes to do so, or
might have to sell them at less than fair value. In addition,
market quotations
are less readily available. Therefore, the judgment of the
Adviser may at times
play a greater role in valuing these securities than in the case
of unrestricted
securities.
WHEN-ISSUED SECURITIES: In order to help ensure the
availability of suitable
securities for its portfolio, the Fund may purchase
securities on a "when-
issued" or on a "forward delivery" basis, which means that the
obligations will
be delivered to the Fund at a future date usually beyond
customary settlement
time. It is expected that, under normal circumstances, the
Fund will take
delivery of such securities. In general, the Fund does
not pay for the
securities until received and does not start earning interest on
the obligations
until the contractual settlement date. While awaiting
delivery of the
obligations purchased on such bases, the Fund will establish
a segregated
account consisting of cash, short-term money market instruments
or high quality
debt securities equal to the amount of the commitments to purchase
"when-issued"
securities. See the Statement of Additional Information.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in
corporate asset-
backed securities. These securities, issued by trusts and
special purpose
corporations, are backed by a pool of assets, such as credit card
or automobile
loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For
instance, in the
case of credit card receivables, these securities may not have
the benefit of
any security interest in the related collateral. See the Statement
of Additional
Information for further information on these securities.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may
invest a portion
of its assets in "loan participations" and other direct
indebtedness. By
purchasing a loan participation, the Fund acquires some or all
of the interest
of a bank or other lending institution in a loan to a corporate
borrower. Many
such loans are secured, and most impose restrictive covenants
which must be met
by the borrower. These loans are made generally to finance
internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and
other corporate
activities. Such loans may be in default at the time of purchase.
The Fund may
also purchase other direct indebtedness such as trade or other
claims against
companies, which generally represent money owed by the company to
a supplier of
goods and services. These claims may also be purchased at a
time when the
company is in default. Certain of the loan participations and
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.
The highly leveraged nature of many such loans and other direct
indebtedness may
make such loans especially vulnerable to adverse changes in
economic or market
conditions. Loan participations and other direct indebtedness may
not be in the
form of securities or may be subject to restrictions on
transfer, and only
limited opportunities may exist to resell such instruments. As
a result, the
Fund may be unable to sell such investments at an opportune time
or may have to
resell them at less than fair market value. For a further
discussion of loan
participations, other direct indebtedness and the risks related
to transactions
therein, see the Statement of Additional Information.
FOREIGN SECURITIES: The Fund may invest up to 25%, and
generally expects to
invest between 0% and 10% of its total assets in foreign
securities (not
including American Depositary Receipts). 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, governmental administration or
economic or
monetary policy (in the United States or abroad) or
circumstances in dealings
between nations. Costs may be incurred in connection with
conversions between
various currencies. Special considerations may also include
more limited
information about foreign issuers, higher brokerage costs,
different accounting
standards and thinner trading markets. Foreign securities
markets may also be
less liquid, more volatile and less subject to government
supervision than in
the United States. Investments in foreign countries could be
affected by other
factors including expropriation, confiscatory taxation
and potential
difficulties in enforcing contractual obligations and could
be subject to
extended settlement periods. The Fund may hold foreign
currency received in
connection with investments in foreign securities when, in the
judgment of the
Adviser, it would be beneficial to convert such currency into
U.S. dollars at a
later date, based on anticipated changes in the relevant exchange
rate. The Fund
may also hold foreign currency in anticipation of purchasing
foreign securities.
See the Statement of Additional Information for further
discussion of foreign
securities and the holding of foreign currency, as well as the
associated risk.
EMERGING MARKET SECURITIES: The Fund may invest in countries
or regions with
relatively low gross national product per capita compared to the
world's major
economies, and in countries or regions with the potential for
rapid economic
growth (emerging markets). Emerging markets will include any
country: (i) having
an "emerging stock market" as defined by the International
Finance Corporation;
(ii) with low-to-middle-income economies according to the
International Bank for
Reconstruction and Development (the "World Bank"); (iii) listed
in World Bank
publications as developing; or (iv) determined by the Adviser to
be an emerging
market as defined above. The Fund may invest in securities of: (i)
companies the
principal securities trading market for which is an emerging
market country;
(ii) companies organized under the laws of, and with a principal
office in, an
emerging market country; (iii) companies whose principal
activities are located
in emerging market countries; or (iv) companies traded in
any market that
derives 50% or more of their total revenue from either goods
or services
produced in an emerging market or sold in an emerging market.
The risks of investing in foreign securities may be intensified
in the case of
investments in emerging markets. Securities of many issuers in
emerging markets
may be less liquid and more volatile than securities of
comparable domestic
issuers. Emerging markets also have different clearance
and settlement
procedures, and in certain markets there have been times when
settlements have
been unable to keep pace with the volume of securities
transactions, making it
difficult to conduct such transactions. Delays in settlement
could result in
temporary periods when a portion of the assets of the Fund is
uninvested and no
return is earned thereon. The inability of the Fund to make
intended security
purchases due to settlement problems could cause the Fund to
miss attractive
investment opportunities. Inability to dispose of portfolio
securities due to
settlement problems could result either in losses to the Fund due
to subsequent
declines in value of the portfolio security or, if the Fund has
entered into a
contract to sell the security, in possible liability to the
purchaser. Certain
markets may require payment for securities before delivery.
Securities prices in
emerging markets can be significantly more volatile than in the
more developed
nations of the world, reflecting the greater uncertainties of
investing in less
established markets and economies. In particular, countries
with emerging
markets may have relatively unstable governments, present
the risk of
nationalization of businesses, restrictions on foreign
ownership, or
prohibitions of repatriation of assets, and may have less
protection of property
rights than more developed countries. The economies of countries
with emerging
markets may be predominantly based on only a few industries,
may be highly
vulnerable to changes in local or global trade conditions, and
may suffer from
extreme and volatile debt burdens or inflation rates. Local
securities markets
may trade a small number of securities and may be unable to
respond effectively
to increases in trading volume, potentially making prompt
liquidation of
substantial holdings difficult or impossible at times.
Securities of issuers
located in countries with emerging markets may have limited
marketability and
may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for
the repatriation
of investment income, capital or the proceeds of sales of
securities by foreign
investors. In addition, if a deterioration occurs in an
emerging market's
balance of payments or for other reasons, a country could
impose temporary
restrictions on foreign capital remittances. The Fund could
be adversely
affected by delays in, or a refusal to grant, any required
governmental approval
for repatriation of capital, as well as by the application to
the Fund of any
restrictions on investments.
Investments in certain foreign emerging market debt
obligations may be
restricted or controlled to varying degrees. These restrictions
or controls may
at times preclude investment in certain foreign emerging market
debt obligations
and increase the expenses of the Fund.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in ADRs which
are certificates
issued by a U.S. depository (usually a bank) and represent a
specified quantity
of shares of an underlying non-U.S. stock on deposit with a
custodian bank as
collateral. Because ADRs trade on United States securities
exchanges, the
Adviser does not treat them as foreign securities. However, they
are subject to
many of the risks of foreign securities such as exchange rates
and more limited
information about foreign issuers. (See "Additional Risk
Factors").
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS: The Fund
may enter into
transactions in options, futures and forward contracts on
a variety of
instruments and indices, in order to protect against declines
in the value of
portfolio securities or increases in the cost of securities or
other assets to
be acquired and, subject to applicable law, to increase the Fund's
gross income.
The types of instruments to be purchased and sold by the Fund
are described in
the Statement of Additional Information, which should be read
in conjunction
with the following section. In addition, the Statement of
Additional Information
contains a further discussion of the nature of the transactions
which may be
entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call
and put options
and purchase call and put options on securities. The Fund will
write options on
securities for the purpose of increasing its return on such
securities and/or to
protect the value of its portfolio. In particular, where the
Fund writes an
option which expires unexercised or is closed out by the Fund at
a profit, it
will retain the premium paid for the option which will increase
its gross income
and will offset in part the reduced value of the portfolio
security underlying
the option, or the increased cost of portfolio securities to be
acquired. In
contrast, however, if the price of the underlying security
moves adversely to
the Fund's position, the option may be exercised and the Fund
will be required
to purchase or sell the underlying security at a disadvantageous
price, which
may only be partially offset by the amount of the premium. The
Fund may also
write combinations of put and call options on the same
security, known as
"straddles." Such transactions can generate additional premium
income but also
present increased risk.
By writing a call option on a security, the Fund limits its
opportunity to
profit from any increase in the market value of the underlying
security, since
the holder will usually exercise the call option when the
market value of the
underlying security exceeds the exercise price of the call.
However, the Fund
retains the risk of depreciation in value of securities on which
it has written
call options.
The Fund may also purchase put or call options in
anticipation of market
fluctuations which may adversely affect the value of its portfolio
or the prices
of securities that the Fund wants to purchase at a later date. In
the event that
the expected market fluctuations occur, the Fund may be able
to offset the
resulting adverse effect on its portfolio, in whole or in
part, through the
options purchased. The premium paid for a put or call
option plus any
transaction costs will reduce the benefit, if any, realized by
the Fund upon
exercise or liquidation of the option, and, unless the price of
the underlying
security changes sufficiently, the option may expire without value
to the Fund.
In certain instances, the Fund may enter into options on
Treasury securities
which may be referred to as "reset" options or "adjustable
strike" options.
These options provide for periodic adjustment of the strike
price and may also
provide for the periodic adjustment of the premium during
the term of the
option.
OPTIONS ON STOCK INDICES -- The Fund may write (sell) covered
call and put
options and purchase call and put options on stock indices. The
Fund may write
options on stock indices for the purpose of increasing its gross
income and to
protect its portfolio against declines in the value of
securities it owns or
increases in the value of securities to be acquired. When the
Fund writes an
option on a stock index, and the value of the index moves
adversely to the
holder's position, the option will not be exercised, and the
Fund will either
close out the option at a profit or allow it to expire
unexercised. The Fund
will thereby retain the amount of the premium, less related
transaction costs,
which will increase its gross income and offset part of the
reduced value of
portfolio securities or the increased cost of securities to be
acquired. Such
transactions, however, will constitute only partial hedges against
adverse price
fluctuations, since any such fluctuations will be offset only to
the extent of
the premium received by the Fund for the writing of the option,
less related
transaction costs. In addition, if the value of an underlying
index moves
adversely to the Fund's option position, the option may be
exercised, and the
Fund will experience a loss which may only be partially offset by
the amount of
the premium received.
The Fund may also purchase put or call options on stock
indices in order,
respectively, to hedge its investments against a decline in value
or to attempt
to reduce the risk of missing a market or industry segment
advance. The Fund's
possible loss in either case will be limited to the premium paid
for the option,
plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- The Fund may enter into stock index
futures contracts.
(Unless otherwise specified, futures contracts on indices are
referred to as
"Futures Contracts.") The Fund will utilize Futures Contracts
for hedging and
non-hedging purposes, subject to applicable law. Purchases or
sales of stock
index futures contracts for hedging purposes are used to attempt
to protect the
Fund's current or intended stock investments from broad
fluctuations in stock
prices. In the event that an anticipated decrease in the value
of portfolio
securities occurs as a result of a general stock market
decline, a general
increase in interest rates or a decline in the dollar
value of foreign
currencies in which portfolio securities are denominated, the
adverse effects of
such changes may be offset, in whole or part, by gains on the
sale of Futures
Contracts. Conversely, the increased cost of portfolio
securities to be
acquired, caused by a general rise in the stock market, a
general decline in
interest rates or a rise in the dollar value of foreign
currencies, may be
offset, in whole or part, by gains on Futures Contracts
purchased by the Fund.
The Fund will incur brokerage fees when it purchases and
sells Futures
Contracts, and it will be required to make and maintain margin
deposits.
OPTIONS ON FUTURES CONTRACTS -- The Fund may purchase and write
options on stock
index futures contracts. (Unless otherwise specified, options
on stock index
futures contracts are referred to as "Options on Futures
Contracts.") Such
investment strategies will be used for hedging and non-hedging
purposes, subject
to applicable law. Put and call Options on Futures Contracts
may be traded by
the Fund in order to protect against declines in the values
of portfolio
securities or against increases in the cost of securities to
be acquired.
Purchases of Options on Futures Contracts may present less risk
in hedging the
portfolios of the Fund than the purchase or sale of the
underlying Futures
Contracts since the potential loss is limited to the amount of
the premium plus
related transaction costs. The writing of such options,
however, does not
present less risk than the trading of Futures Contracts and will
constitute only
a partial hedge, up to the amount of the premium received. In
addition, if an
option is exercised, the Fund may suffer a loss on the
transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY -- The Fund may enter into
contracts for
the purchase or sale of a specific currency at a future date at
a price set at
the time of the contract (a "Forward Contract"). The Fund
will enter into
Forward Contracts for hedging and non-hedging purposes, including
transactions
entered into for the purpose of profiting from anticipated
changes in foreign
currency exchange rates. Transactions in Forward Contracts
entered into for
hedging purposes may include forward purchases or sales of
foreign currencies
for the purpose of protecting the dollar value of securities
denominated in a
foreign currency or protecting the dollar equivalent of interest
or dividends to
be paid on such securities. The Fund may also enter into Forward
Contracts for
"cross hedging" purposes, e.g., the purchase or sale of a
Forward Contract on
one type of currency as a hedge against adverse fluctuations in
the value of a
second type of currency. By entering into such transactions,
however, the Fund
may be required to forgo the benefits of advantageous changes in
exchange rates.
The Fund may also enter into transactions in Forward Contracts
for other than
hedging purposes. For example, if the Adviser believes that
the value of a
particular foreign currency will increase or decrease relative
to the value of
the U.S. dollar, the Fund may purchase or sell such currency,
respectively,
through a Forward Contract. If the expected changes in the value
of the currency
occur, the Fund will realize profits which will increase its gross
income. Such
transactions, however, may be considered speculative and
could involve
significant risk of loss, as set forth below. The Fund
has established
procedures consistent with statements of the SEC and its staff
regarding the use
of Forward Contracts by registered investment companies, which
requires use of
segregated assets or "cover" in connection with the purchase
and sale of such
Contracts.
Forward Contracts are traded over-the-counter, and not on
organized commodities
or securities exchanges. As a result, such contracts
operate in a manner
distinct from exchange-traded instruments, and their use involves
certain risks
beyond those associated with transactions in the Futures and
Options contracts
described above.
OPTIONS ON FOREIGN CURRENCIES -- The Fund may purchase and
write put and call
options on foreign currencies for the purpose of protecting
against declines in
the dollar value of portfolio securities, and against increases
in the dollar
cost of securities to be acquired. As in the case of other
types of options,
however, the writing of an option on foreign currency will
constitute only a
partial hedge, up to the amount of the premium received, and the
Fund could be
required to purchase or sell foreign currencies at
disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on
foreign currency
may constitute an effective hedge against fluctuations in
exchange rates
although, in the event of rate movements adverse to the Fund's
position, it may
forfeit the entire amount of the premium plus related transaction
costs. As in
the case of Forward Contracts, certain options on foreign
currencies are traded
over-the-counter and involve risks which may not be present
in the case of
exchange-traded instruments.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD
CONTRACTS --
Although the Fund will enter into certain transactions in
Futures Contracts,
Options on Futures Contracts, Forward Contracts and options
for hedging
purposes, such transactions do involve certain risks. For
example, a lack of
correlation between the index or instrument underlying an
option, Futures
Contract or Forward Contract and the assets being hedged, or
unexpected adverse
price movements, could render the Fund's hedging strategy
unsuccessful and could
result in losses. "Cross hedging" transactions may involve
greater correlation
risks. In addition, there can be no assurance that a liquid
secondary market
will exist for any contract purchased or sold, and the Fund may
be required to
maintain a position until exercise or expiration, which could
result in losses.
As noted, the Fund may also enter into transactions in such
instruments (except
for options on foreign currencies) for other than hedging
purposes (subject to
applicable law), including speculative transactions, which involve
greater risk.
In entering into such transactions, the Fund may experience losses
which are not
offset by gains on other portfolio positions, thereby reducing its
gross income.
In addition, the markets for such instruments may be extremely
volatile from
time to time, as discussed in the Statement of Additional
Information, which
could increase the risks incurred by the Fund in
entering into such
transactions.
Transactions in options may be entered into on U.S. exchanges
regulated by the
SEC, in the over-the-counter market and on foreign exchanges,
while Forward
Contracts may be entered into only in the over-the-counter
market. Futures
Contracts and Options on Futures Contracts may be entered into on
U.S. exchanges
regulated by the Commodity Futures Trading Commission (the
"CFTC") and on
foreign exchanges. The securities underlying options and
Futures Contracts
traded by the Fund may include domestic as well as foreign
securities. Investors
should recognize that transactions involving foreign
securities or foreign
currencies, and transactions entered into in foreign
countries, may involve
considerations and risks not typically associated with
investing in U.S.
markets.
Transactions in options, Futures Contracts, Options on Futures
Contracts and
Forward Contracts entered into for non-hedging purposes involve
greater risk and
could result in losses which are not offset by gains on other
portfolio assets.
For example, the Fund may sell Futures Contracts on an index of
securities in
order to profit from any anticipated decline in the value of
the securities
comprising the underlying index. In such instances, any losses
on the Futures
transaction will not be offset by gains on any portfolio
securities comprising
such index, as might occur in connection with a hedging
transaction. The risks
related to transactions in options, Futures Contracts,
Options on Futures
Contracts and Forward Contracts entered into by the Fund are
set forth in
greater detail in the Statement of Additional Information,
which should be
reviewed in conjunction with the foregoing discussion.
PORTFOLIO TRADING
The Fund intends to manage its portfolio by buying and selling
securities to
help attain its investment objective. The Fund will engage in
portfolio trading
if it believes a transaction, net of costs (including custodian
charges), will
help in attaining its investment objective. (See "Portfolio
Transactions and
Brokerage Commissions" in the Statement of Additional
Information.)
The primary consideration in placing portfolio security
transactions with
broker-dealers for execution is to obtain, and maintain the
availability of,
execution at the most favorable prices and in the most
effective manner
possible. Consistent with the foregoing primary consideration, the
Rules of Fair
Practice of the National Association of Securities Dealers,
Inc. (the "NASD")
and such other policies as the Trustees may determine, the
Adviser may consider
sales of shares of the Fund and of other investment company
clients of MFD, as a
factor in the selection of broker-dealers to execute the
Fund's portfolio
transactions. From time to time, the Adviser may direct
certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to
pay a portion
of the Fund's operating expenses (e.g., fees charged by the
custodian of the
Fund's assets). For a further discussion of portfolio trading, see
the Statement
of Additional Information.
-----------------
The policies described above are not fundamental and may be
changed without
shareholder approval, as may the Fund's investment objective. A
change in the
Fund's investment objective may result in the Fund having
an investment
objective different from the objective which the
shareholder considered
appropriate at the time of investment in the Fund.
The Statement of Additional Information includes a
discussion of other
investment policies and a listing of specific investment
restrictions which
govern the Fund's investment policies. The specific investment
restrictions
listed in the Statement of Additional Information may not be
changed without
shareholder approval (see "Investment Restrictions" in the
Statement of
Additional Information). The Fund's investment limitations,
policies and rating
standards are adhered to at the time of purchase or utilization
of assets; a
subsequent change in circumstances will not be considered to
result in a
violation of policy.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an
Investment Advisory
Agreement dated August 1, 1993 (the "Advisory Agreement"). The
Adviser provides
the Fund with overall investment advisory and administrative
services, as well
as general office facilities. John W. Ballen, a Senior Vice
President of the
Adviser, has been the Fund's portfolio manager since the Fund's
inception in
1986. Mr. Ballen has been employed by the Adviser since 1984.
Subject to such
policies as the Trustees may determine, the Adviser makes
investment decisions
for the Fund. For its services and facilities, the Adviser
receives a management
fee, computed and paid monthly, in an amount equal to 0.75%
of the Fund's
average daily net assets for its then-current fiscal year.
For the Fund's fiscal year ended November 30, 1994, the
Adviser received
management fees under the Fund's Advisory Agreement of $8,805,097.
MFS also serves as investment adviser to each of the other
funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal
Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special
Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable
Insurance Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund,
Inc. and seven
variable accounts, each of which is a registered investment
company established
by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination
fixed/variable
annuity contracts. MFS and its wholly owned subsidiary, MFS
Asset Management,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and
its predecessor
organizations have a history of money management dating from
1924 and the
founding of the first mutual fund in the United States,
Massachusetts Investors
Trust. Net assets under the management of the MFS
organization were
approximately $34.5 billion on behalf of approximately 1.6
million investor
accounts as of February 28, 1995. As of such date, the MFS
organization managed
approximately $11.5 billion of assets invested in equity
securities and
approximately $19.5 billion of assets invested in fixed
income securities.
Approximately $3.1 billion of the assets managed by MFS are
invested in
securities of foreign issuers and non-U.S. dollar denominated
securities of U.S.
issuers. MFS is a wholly owned subsidiary of Sun Life of Canada
(U.S.), which in
turn is a wholly owned subsidiary of Sun Life Assurance Company
of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L.
Shames, Arnold D.
Scott, John D. McNeil and John R. Gardner. Mr. Brodkin is the
Chairman, Mr.
Shames is the President and Mr. Scott is the Secretary and a
Senior Executive
Vice President of MFS. Messrs. McNeil and Gardner are the
Chairman and
President, respectively, of Sun Life. Sun Life, a mutual life
insurance company,
is one of the largest international life insurance companies
and has been
operating in the United States since 1895, establishing a
headquarters office
here in 1973. The executive officers of MFS report to the Chairman
of Sun Life.
A. Keith Brodkin, the Chairman of MFS, is the Chairman and
President of the
Trust. W. Thomas London, Stephen E. Cavan, James R. Bordewick,
Jr., Leslie J.
Nanberg and James O. Yost, all of whom are officers of MFS, are
officers of the
Trust.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the
distributor of
shares of the Fund and also serves as distributor for each of
the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the
"Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs
transfer agency,
certain dividend disbursing agency and other services for the
Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering
price through any
securities dealer, certain banks and other financial institutions
having selling
agreements with MFD. Non-securities dealer financial
institutions will receive
transaction fees that are the same as commission fees to
dealers. Securities
dealers and other financial institutions may also charge their
customers fees
relating to investments in the Fund.
The Fund offers two classes of shares which bear sales charges and
distribution
fees in different forms and amounts:
CLASS A SHARES: Class A shares are offered at net asset value plus
an initial
sales charge (or CDSC in the case of certain purchases of $1
million or more) as
follows:
<TABLE>
- ------------------------------------------------------------------
- -------------------------------------------------------------
<CAPTION>
SALES CHARGE<F1> AS
PERCENTAGE OF:
-----
- -------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE
OFFERING PRICE INVESTED OF OFFERING PRICE
<S> <C>
<C> <C>
Less than $50,000 .....................................
5.75% 6.10% 5.00%
$50,000 but less than $100,000 ........................
4.75 4.99 4.00
$100,000 but less than $250,000 .......................
4.00 4.17 3.20
$250,000 but less than $500,000 .......................
2.95 3.04 2.25
$500,000 but less than $1,000,000 .....................
2.20 2.25 1.70
$1,000,000 or more ....................................
None<F2> None<F2> See Below<F2>
<FN>
- ----------
<F1> Because of rounding in the calculation of offering price,
actual sales
charges may be more or less than those calculated using
the percentages
above.
<F2> A CDSC may apply in certain circumstances. MFD (on behalf of
the Fund) will
pay a commission on purchases of $1 million or more.
</TABLE>
No sales charge is payable at the time of purchase of
Class A shares on
investments of $1 million or more. However, a CDSC may be
imposed on such
investments in the event of a share redemption within 12 months
following the
share purchase, at the rate of 1% on the lesser of the value
of the shares
redeemed (exclusive of reinvested dividends and capital gain
distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable,
and, if so, the
amount of the charge, it is assumed that shares not subject to
the CDSC are the
first redeemed followed by other shares held for the longest
period of time. All
investments made during a calendar month, regardless of when
during the month
the investment occurred, will age one month on the last day of
the month and
each subsequent month. Except as noted below, the CDSC on Class A
shares will be
waived in the case of: (i) exchanges (except that if the shares
acquired by
exchange were then redeemed within 12 months of the initial
purchase (other than
in connection with subsequent exchanges to other MFS Funds),
the charge would
not be waived); (ii) distributions to participants from a
retirement plan
qualified under section 401(a) of the Internal Revenue Code of
1986, as amended
(the "Code") (a "Retirement Plan"), due to: (a) a loan from the
plan (repayments
of loans, however, will constitute new sales for purposes of
assessing the
CDSC); (b) "financial hardship" of the participant in the plan,
as that term is
defined in Treasury Regulation Section 1.401(k)-1(d)(2), as
amended from time to
time; or (c) the death of a participant in such a plan; (iii)
distributions from
a 403(b) plan or an Individual Retirement Account ("IRA"),
due to death,
disability, or attainment of age 59 1/2; (iv) tax-free
returns of excess
contributions to an IRA; (v) distributions by other employee
benefit plans to
pay benefits; and (vi) certain involuntary redemptions and
redemptions in
connection with certain automatic withdrawals from a qualified
Retirement Plan.
The CDSC on Class A shares will not be waived, however, if the
Retirement Plan
withdraws from the Fund except that if the Retirement Plan has
invested its
assets in Class A shares of 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 Retirement
Plan first invests its assets in Class A shares of one or more of
the MFS Funds,
the CDSC on Class A shares will be waived in the case of a
redemption of all of
the Retirement Plan's shares (including shares of any other
class) in all MFS
Funds (i.e., all the assets of the Retirement Plan invested in the
MFS Funds are
withdrawn), unless immediately prior to the redemption, the
aggregate amount
invested by the Retirement Plan in Class A shares of the MFS
Funds (excluding
the reinvestment of distributions) during the prior four year
period equals 50%
or more of the total value of the Retirement Plan's assets in the
MFS Funds, in
which case the CDSC will not be waived. The CDSC on Class A
shares will be
waived upon redemption by a Retirement Plan where the redemption
proceeds are
used to pay expenses of the Retirement Plan or certain expenses
of participants
under the Retirement Plan (e.g., participant account fees),
provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k)
Plan\s/\m/ or
another similar recordkeeping system made available by the
Shareholder Servicing
Agent. The CDSC on Class A shares will be waived upon the
transfer of
registration from shares held by a Retirement Plan through a
single account
maintained by the Shareholder Servicing Agent to multiple Class A
share accounts
maintained by the Shareholder Servicing Agent on behalf
of individual
participants in the Retirement Plan, provided that the Retirement
Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan\s/\m/ or
another similar
recordkeeping system made available by the Shareholder
Servicing Agent. Any
applicable CDSC will be deferred upon an exchange of Class A
shares of the Fund
for units of participation of the MFS Fixed Fund (a bank
collective investment
fund) (the "Units"), and the CDSC will be deducted from the
redemption proceeds
when such Units are subsequently redeemed (assuming the CDSC is
then payable).
No CDSC will be assessed upon an exchange of Units for Class A
shares of the
Fund. For purposes of calculating the CDSC payable upon
redemption of Class A
shares of the Fund or Units acquired pursuant to one or more
exchanges, the
period during which the Units are held will be aggregated with the
period during
which the Class A shares are held. MFD shall receive all CDSCs,
which it intends
to apply for the benefit of the Fund.
MFD allows discounts to dealers (which are alike for all
dealers) from the
applicable public offering price, as shown in the above table.
In the case of
the maximum sales charge, the dealer retains 5% and MFD retains
approximately
3/4 of 1% of the public offering price. The sales charge may
vary depending on
the number of shares of the Fund as well as certain other MFS
Funds and certain
other funds owned or being purchased, the existence of an
agreement to purchase
additional shares during a 13-month period (or 36-month period
for purchases of
$1 million or more) or other special purchase programs. A
description of the
Right of Accumulation, Letter of Intent and Group Purchases
privileges by which
the sales charge may be reduced is set forth in the Statement
of Additional
Information. In addition, MFD, on behalf of the Fund and pursuant
to the Fund's
Class A Distribution Plan described below will pay a commission
to dealers who
initiate and are responsible for purchases of $1 million or
more as follows:
1.00% on sales up to $5 million, plus 0.25% on the amount in
excess of $5
million. Purchases of $1 million or more for each shareholder
account will be
aggregated over a 12-month period (commencing from the date of
the first such
purchase) for purposes of determining the level of commissions to
be paid during
that period with respect to such account.
Class A shares of the Fund may be sold at their net asset value to
the officers
of the Trust, to any of the subsidiary companies of Sun Life,
to eligible
Directors, officers, employees (including retired employees) and
agents of MFS,
Sun Life or any of their subsidiary companies, to any
trust, pension,
profit-sharing or any other benefit plan for such persons, to
any trustees and
retired trustees of any investment company for which MFD serves
as distributor
or principal underwriter, and to certain family members of such
individuals and
their spouses, provided the shares will not be resold except to
the Fund. Class
A shares of the Fund may be sold at net asset value to any
employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to
certain family
members of such individuals and their spouses, or to any
trust, pension,
profit-sharing or other retirement plan for the sole benefit of
such employee or
representative, provided such shares will not be resold
except to the Fund.
Class A shares of the Fund may also be sold at their net asset
value to any
employee or registered representative of any dealer or
other financial
institution which has a sales agreement with MFD or its
affiliate, to certain
family members of such employee or representative and their
spouses, or to any
trust, pension, profit-sharing or other retirement plan for the
sole benefit of
such employee or representative, as well as to clients of
the MFS Asset
Management, Inc. Class A shares may be sold at net asset
value, subject to
appropriate documentation, through a dealer where the amount
invested represents
redemption proceeds from a registered open-end management
investment company not
distributed or managed by MFD or its affiliates if: (i) the
redeemed shares were
subject to an initial sales charge or a deferred sales charge
(whether or not
actually imposed); (ii) such redemption has occurred no more than
90 days prior
to the purchase of Class A shares of the Fund; and (iii) the
Fund, MFD or its
affiliates have not agreed with such company or its
affiliates, formally or
informally, to sell Class A shares at net assets value or
provide any other
incentive with respect to such redemption and sale. Class A
shares of the Fund
may also be sold at net asset value where the amount
invested represents
redemption proceeds from the MFS Fixed Fund. In addition, Class A
shares may be
sold at their net asset value in connection with the acquisition
or liquidation
of the assets of other investment companies or personal
holding companies.
Insurance company separate accounts may also purchase Class A
shares of the Fund
at their net asset value per share. Class A shares of the Fund
may be purchased
at net asset value by retirement plans whose third party
administrators have
entered into an administrative services agreement with MFD or one
or more of its
affiliates to perform certain administrative services,
subject to certain
operational requirements specified from time to time by MFD or
one or more of
its affiliates. Class A shares of the Fund may be purchased at
net asset value
through certain broker-dealers and other financial
institutions which have
entered into an agreement with MFD which includes a requirement
that such shares
be sold for the benefit of clients participating in a "wrap
account" or a
similar program under which such clients pay a fee to such
broker-dealer or
other financial institution.
Class A shares of the Fund may be purchased at net asset
value by certain
retirement plans subject to the Employee Retirement Income
Security Act of 1974,
as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the
satisfaction of MFD
that either (a) the employer has at least 25 employees or (b)
the aggregate
purchases by the retirement plan of Class A shares of the MFS
Funds will be
in an amount of at least $250,000 within a reasonable
period of time, as
determined by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the
event of certain
redemption transactions within 12 months following such
purchases.
Dealers who initiate and are responsible for purchases of Class A
shares of the
Fund in this manner will be paid a commission by MFD, as follows:
1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5
million; provided,
however, MFD may pay a commission, on sales in excess of $5
million to certain
retirement plans, of 1.00% to certain dealers which, at MFD's
invitation, enter
into an agreement with MFD in which the dealer agrees to return
any commission
paid to it on the sale (or on a pro rata portion thereof) if
the shareholder
redeems his or her shares within a period of time after purchase
as specified by
MFD. Purchases of $1 million or more for each shareholder
account will be
aggregated over a 12-month period (commencing from the date of
the first such
purchase) for purposes of determining the level of commissions to
be paid during
that period with respect to such account.
Class A shares of the Fund may be purchased at net asset value
by retirement
plans qualified under section 401(k) of the Code through certain
broker-dealers
and other financial institutions which have entered into an
agreement with MFD
which includes certain minimum size qualifications for such
retirement plans and
provides that the broker-dealer or other financial institution
will perform
certain administrative services with respect to the plan's
account. Class A
shares of the Fund may be sold at net asset value through
the automatic
reinvestment of Class A and Class B distributions which
constitute required
withdrawals from qualified retirement plans. Furthermore, Class A
shares of the
Fund may be sold at net asset value through the automatic
reinvestment of
distributions of dividends and capital gains of other MFS Funds
pursuant to the
Distribution Investment Program (see "Shareholder Services" in
the Statement of
Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value
without an
initial sales charge but subject to a CDSC as follows:
YEAR OF
CONTINGENT
REDEMPTION
DEFERRED SALES
AFTER PURCHASE
CHARGE
--------------
- --------------
First .........................................................
4%
Second ........................................................
4%
Third .........................................................
3%
Fourth ........................................................
3%
Fifth .........................................................
2%
Sixth .........................................................
1%
Seventh and following .........................................
0%
For Class B shares purchased prior to January 1, 1993, the Fund
imposes a CDSC
as a percentage of redemption proceeds as follows:
YEAR OF
CONTINGENT
REDEMPTION
DEFERRED SALES
AFTER PURCHASE
CHARGE
--------------
- --------------
First .........................................................
6%
Second ........................................................
5%
Third .........................................................
4%
Fourth ........................................................
3%
Fifth .........................................................
2%
Sixth .........................................................
1%
Seventh and following .........................................
0%
No CDSC is paid upon an exchange of shares. For purposes of
calculating the CDSC
upon redemption of shares acquired in an exchange, the
purchase of shares
acquired in one or more exchanges is deemed to have occurred at
the time of the
original purchase of the exchanged shares. See "Redemptions and
Repurchases --
Contingent Deferred Sales Charge" for further discussion of the
CDSC.
The CDSC on Class B shares will be waived upon the death or
disability (as
defined in section 72(m)(7) of the Code) of any investor,
provided the account
is registered (i) in the case of a deceased individual, solely
in the deceased
individual's name, (ii) in the case of a disabled individual,
solely or jointly
in the disabled individual's name or (iii) in the name of a living
trust for the
benefit of the deceased or disabled individual. The CDSC on Class
B shares will
also be waived in the case of redemptions of shares of the Fund
pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B
shares will be
waived in the case of distributions from an IRA, SAR-SEP or any
other retirement
plan qualified under sections 401(a) or 403(b) of the Code
due to death or
disability, or in the case of required minimum distributions
from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class
B shares will
be waived in the case of distributions from a Retirement Plan due
to (i) returns
of excess contribution to the plan, (ii) retirement of a
participant in the
plan, (iii) a loan from the plan (repayments of loans, however,
will constitute
new sales for purposes of assessing the CDSC), (iv) "financial
hardship" of the
participant in the plan, as that term is defined in Treasury
Regulation Section
1.401(k)-1(d)(2), as amended from time to time, and (v)
termination of
employment of the participant in the plan (excluding, however,
a partial or
other termination of the plan). The CDSC on Class B shares will
also be waived
upon redemption by (i) officers of the Trust, (ii) any of
the subsidiary
companies of Sun Life, (iii) eligible Directors, officers,
employees (including
retired and former employees) and agents of MFS, Sun Life
or any of their
subsidiary companies, (iv) any trust, pension, profit-sharing
or any other
benefit plan for such persons, (v) any trustees and retired
trustees of any
investment company for which MFD serves as distributor or
principal underwriter,
and (vi) certain family members of such individuals and their
spouses, provided
in each case that the shares will not be resold except to the
Fund. The CDSC on
Class B shares will also be waived in the case of redemptions by
any employee or
registered representative of any dealer or other financial
institution which has
a sales agreement with MFD, by certain family members of any
such employee or
representative and their spouses, by any trust, pension, profit-
sharing or other
retirement plan for the sole benefit of such employee or
representative and by
clients of the MFS Asset Management, Inc. A Retirement Plan
that has invested
its assets in Class B shares of 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 the
Retirement Plan first invests its assets in Class B shares of one
or more of the
funds in the MFS Funds will have the CDSC on Class B shares
waived in the case
of a redemption of all the Retirement Plan's shares (including
shares of any
other class) in all MFS Funds (i.e., all the assets of the
Retirement Plan
invested in the MFS Funds are withdrawn), except that if,
immediately prior to
the redemption, the aggregate amount invested by the Retirement
Plan in Class B
shares of the MFS Funds (excluding the reinvestment of
distributions) during the
prior four year period equals 50% or more of the total value of
the Retirement
Plan's assets in the MFS Funds, then the CDSC will not be
waived. The CDSC on
Class B shares will be waived upon redemption by a Retirement
Plan where the
redemption proceeds are used to pay expenses of the Retirement
Plan or certain
expenses of participants under the Retirement Plan (e.g.,
participant account
fees), provided that the Retirement Plan's sponsor
subscribes to the MFS
Fundamental 401(k) Plan(SM) or another similar recordkeeping
system made
available by the Shareholder Servicing Agent. The CDSC on Class B
shares will be
waived upon the transfer of registration from shares held by a
Retirement Plan
through a single account maintained by the Shareholder
Servicing Agent to
multiple Class B share accounts provided that the Retirement
Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan\s/\m/ or
another similar
recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC
on Class B shares may also be waived in connection with the
acquisition or
liquidation of the assets of other investment companies or
personal holding
companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund
that remain
outstanding for approximately eight years will convert to Class A
shares of the
Fund. Shares purchased through the reinvestment of distributions
paid in respect
of Class B shares will be treated as Class B shares for purposes
of the payment
of the distribution and service fees under the Distribution Plan
applicable to
Class B shares. However, for purposes of conversion to Class
A shares, all
shares in a shareholder's account that were purchased through
the reinvestment
of dividends and distributions paid in respect of Class B shares
(and which have
not converted to Class A shares as provided in the following
sentence) will be
held in a separate sub-account. Each time any Class B
shares in the
shareholder's account (other than those in the sub-account)
convert to Class A
shares, a portion of the Class B shares then in the sub-
account will also
convert to Class A shares. The portion will be determined by the
ratio that the
shareholder's Class B shares not acquired through reinvestment of
dividends and
distributions that are converting to Class A shares bear to the
shareholder's
total Class B shares not acquired through such reinvestment. The
conversion of
Class B shares to Class A shares is subject to the continuing
availability of a
ruling from the Internal Revenue Service or an opinion of
counsel that such
conversion will not constitute a taxable event for Federal tax
purposes. There
can be no assurance that such ruling or opinion will be
available, and the
conversion of Class B shares to Class A shares will not occur if
such ruling or
opinion is not available. In such event, Class B shares would
continue to be
subject to higher expenses than Class A shares for an indefinite
period.
GENERAL: Except as described below, the minimum initial investment
is $1,000 per
account and the minimum additional investment is $50 per account.
Accounts being
established for monthly automatic investments and under payroll
savings programs
and tax-deferred retirement programs (other than IRAs) involving
the submission
of investments by means of group remittal statements are
subject to a $50
minimum on initial and additional investments per account. The
minimum initial
investment for IRAs is $250 per account and the minimum additional
investment is
$50 per account. Accounts being established for participation in
the Automatic
Exchange Plan are subject to a $50 minimum on initial and
additional investments
per account. There are also other limited exceptions to these
minimums for
certain tax-deferred retirement programs. Any minimums may be
changed at any
time at the discretion of MFD. The Fund reserves the right to
cease offering its
shares for sale at any time.
For shareholders who elect to participate in certain investment
programs (e.g.,
the Automatic Investment Plan) or other shareholder
services, MFD or its
affiliate may either (i) give a gift of nominal value, such
as a hand-held
calculator, or (ii) make a nominal charitable contribution on
their behalf.
A shareholder whose shares are held in the name of, or
controlled by, an
investment dealer, might not receive many of the privileges and
services from
the Fund (such as Right of Accumulation, Letter of Intent
and certain
recordkeeping services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes
only. The Fund
and MFD each reserve the right to reject any specific
purchase order or to
restrict purchases by a particular purchaser (or group of related
purchasers).
The Fund or MFD may reject or restrict any purchases by a
particular purchaser
or group, for example, when such purchase is contrary to the
best interests of
the Fund's other shareholders or otherwise would disrupt the
management of the
Fund.
MFD may enter into an agreement with shareholders who intend to
make exchanges
among certain classes of certain MFS Funds (as determined by MFD)
which follow a
timing pattern, and with individuals or entities acting on such
shareholders'
behalf (collectively, "market timers"), setting forth the terms,
procedures and
restrictions with respect to such exchanges. In the absence
of such an
agreement, it is the policy of the Fund and MFD to reject or
restrict purchases
by market timers if (i) more than two exchange purchases are
effected in a timed
account in the same calendar quarter or (ii) a purchase would
result in shares
being held in timed accounts by market timers representing
more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts
in the case of
certain MFS Funds which may include the Fund and which may
change from time to
time. The Fund and MFD each reserve the right to request market
timers to redeem
their shares at net asset value, less any applicable CDSC, if
either of these
restrictions is violated.
Securities dealers and other financial institutions may
receive different
compensation with respect to sales of Class A and Class B
shares. In some
instances, promotional incentives to dealers may be offered
only to certain
dealers who have sold or may sell significant amounts of Fund
shares. From time
to time, MFD may pay dealers 100% of the applicable sales
charge on sales of
Class A shares of certain specified MFS Funds sold by such
dealer during a
specified sales period. In addition, MFD or its affiliates
may, from time to
time, pay dealers an additional commission equal to 0.50% of the
net asset value
of all of the Class B shares of certain specified MFS Funds sold
by such dealer
during a specified sales period. In addition, from time to
time, MFD, at its
expense, may provide additional commissions, compensation
or promotional
incentives ("concessions") to dealers which sell shares of the
Fund. The staff
of the SEC has indicated that dealers who receive more than
90% of the sales
charge may be considered underwriters. Such concessions
provided by MFD may
include financial assistance to dealers in connection
with preapproved
conferences or seminars, sales or training programs for
invited registered
representatives, payment for travel expenses, including
lodging, incurred by
registered representatives and members of their families or other
invited guests
to various locations for such seminars or training programs,
seminars for the
public, advertising and sales campaigns regarding one or more MFS
Funds, and/or
other dealer-sponsored events. In some instances, these
concessions may be
offered to dealers or only to certain dealers who have sold or may
sell, during
specified periods, certain minimum amounts of shares of the
Fund. Other
concessions may be offered to the extent not prohibited by the
laws of the state
or any self-regulatory agency, such as the National Association
of Securities
Dealers, Inc. (the "NASD").
The Glass-Steagall Act prohibits national banks from engaging in
the business of
underwriting, selling or distributing securities. Although
the scope of the
prohibition has not been clearly defined, MFD believes that such
Act should not
preclude banks from entering into agency agreements with MFD
(as described
above). If, however, a bank were prohibited from so acting, the
Trustees would
consider what actions, if any, would be necessary to
continue to provide
efficient and effective shareholder services. It is not
expected that
shareholders would suffer any adverse financial consequence as a
result of these
occurrences. In addition, state securities laws on this issue
may differ from
the interpretation of federal law expressed herein, and banks
and financial
institutions may be required to register as broker-dealers
pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of
the shares in an
account with the Fund for which payment has been received by the
Fund (i.e., an
established account) may be exchanged for shares of the same class
of any of the
other MFS Funds (if available for sale) at net asset value.
Shares of one class
may not be exchanged for shares of any other class. Exchanges
will be made only
after instructions in writing or by telephone (an "Exchange
Request") are
received for an established account by the Shareholder Servicing
Agent in proper
form (i.e., if in writing -- signed by the record owner(s) exactly
as the shares
are registered; if by telephone -- proper account identification
is given by the
dealer or shareholder of record); and each exchange must involve
either shares
having an aggregate value of at least $1,000 ($50 in the case of
retirement plan
participants whose sponsoring organizations subscribe to the
MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made
available by the
Shareholder Servicing Agent) or all the shares in the account.
If the Exchange
Request is received by the Shareholder Servicing Agent on any
business day prior
to the close of regular trading on the Exchange, the exchange
usually will occur
on that day if all the requirements set forth above have been
complied with at
that time. No more than five exchanges may be made in any one
Exchange Request
by telephone. Additional information concerning this exchange
privilege and
prospectuses for any of the other MFS Funds may be obtained
from investment
dealers or the Shareholder Servicing Agent. A shareholder
should read the
prospectus of the other MFS Fund and consider the differences in
objectives and
policies before making any exchange. For federal and (generally)
state income
tax purposes, an exchange is treated as a sale of the shares
exchanged and,
therefore, an exchange could result in a gain or loss to the
shareholder making
the exchange. Exchanges by telephone are automatically
available to most non-
retirement plan accounts and certain retirement plan
accounts. For further
information regarding exchanges by telephone see "Redemptions By
Telephone." The
exchange privilege (or any aspect of it) may be changed or
discontinued and is
subject to certain limitations, including certain restrictions
on purchases by
market timers. Special procedures, privileges and restrictions
with respect to
exchanges may apply to market timers who enter into an agreement
with MFD, as
set forth in such agreement. (See "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in
his account on
any date on which the Fund is open for business by redeeming
shares at their net
asset value or by selling such shares to the Fund through
a dealer (a
repurchase). Since the net asset value of shares of the
account fluctuates,
redemptions or repurchases, which are taxable transactions, are
likely to result
in gains or losses to the shareholder. When a shareholder
withdraws an amount
from his account, the shareholder is deemed to have tendered
for redemption a
sufficient number of full and fractional shares in his account
to cover the
amount withdrawn. The proceeds of a redemption or repurchase
will normally be
available within seven days, except for shares purchased, or
received in
exchange for shares purchased, by check (including certified
checks or cashier's
checks); payment of redemption proceeds may be delayed for up
to 15 days from
the purchase date in an effort to assure that such check has
cleared. Payment of
redemption proceeds may be delayed for up to seven days from the
redemption date
if the Fund determines that such a delay would be in the best
interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to
redeem all or any
portion of the shares in his account by mailing or delivering to
the Shareholder
Servicing Agent (see back cover for address) a stock power
with a written
request for redemption or a letter of instruction, together
with his share
certificates (if any were issued), all in "good order" for
transfer. "Good
order" generally means that the stock power, written request
for redemption,
letter of instruction or certificate must be endorsed by the
record owner(s)
exactly as the shares are registered and the signature(s) must be
guaranteed in
the manner set forth below under the caption "Signature
Guarantee." In addition,
in some cases "good order" may require the furnishing of
additional documents.
The Shareholder Servicing Agent may make certain de minimis
exceptions to the
above requirements for redemption. Within seven days after
receipt of a
redemption request in "good order" by the Shareholder Servicing
Agent, the Fund
will make payment in cash of the net asset value of the shares
next determined
after such redemption request was received, reduced by the
amount of any
applicable CDSC described above and the amount of any income tax
required to be
withheld, except during any period in which the right of
redemption is suspended
or date of payment is postponed because the Exchange is closed
or trading on
such Exchange is restricted or to the extent otherwise
permitted by the 1940
Act, if an emergency exists (see "Tax Status").
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an
amount from his
account by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-
2606. Shareholders wishing to avail themselves of this
telephone redemption
privilege must so elect on their Account Application,
designate thereon a
commercial bank and account number to receive the proceeds of
such redemption,
and sign the Account Application Form with the signature(s)
guaranteed in the
manner set forth below under the caption "Signature Guarantee."
The proceeds of
such a redemption, reduced by the amount of any applicable CDSC
described above
and the amount of any income tax required to be withheld, are
mailed by check to
the designated account, without charge. As a special service,
investors may
arrange to have proceeds in excess of $1,000 wired in federal
funds to the
designated account. If a telephone redemption request is
received by the
Shareholder Servicing Agent by the close of regular trading on
the Exchange on
any business day, shares will be redeemed at the closing net
asset value of the
Fund on that day. Subject to the conditions described in this
section, proceeds
of a redemption are normally mailed or wired on the next business
day following
the date of receipt of the order for redemption. The Shareholder
Servicing Agent
will not be responsible for any losses resulting from
unauthorized telephone
transactions if it follows reasonable procedures designed to
verify the identity
of the caller. The Shareholder Servicing Agent will request
personal or other
information from the caller, and will normally also record calls.
Shareholders
should verify the accuracy of confirmation statements
immediately after their
receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell
his shares at
net asset value through his securities dealer (a repurchase),
the shareholder
can place a repurchase order with his dealer, who may charge the
shareholder a
fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR
TO THE CLOSE OF
REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD
BEFORE THE CLOSE OF
BUSINESS ON THE SAME DAY, THE SHAREHOLDER WILL RECEIVE THE
NET ASSET VALUE
CALCULATED ON THAT DAY.
GENERAL: Shareholders of the Fund who have redeemed their shares
have a one-time
right to reinvest the redemption proceeds in the same class of
shares of any of
the MFS Funds (if shares of such Fund are available for sale) at
net asset value
(with a credit for any CDSC paid) within 90 days of the
redemption pursuant to
the Reinstatement Privilege. If the shares credited for any CDSC
paid are then
redeemed within six years of the initial purchase in the case of
Class B shares,
or within 12 months of the initial purchase for certain Class A
share purchases,
a CDSC will be imposed upon redemption. Such purchases under the
Reinstatement
Privilege are subject to all limitations in the Statement
of Additional
Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations,
the Fund has
reserved the right to pay the redemption or repurchase price of
shares of the
Fund, either totally or partially, by a distribution in kind
of portfolio
securities (instead of cash). The securities so distributed
would be valued at
the same amount as that assigned to them in calculating the net
asset value for
the shares being sold. If a shareholder received a distribution
in kind, the
shareholder could incur brokerage or transaction charges in
converting the
securities to cash.
Due to the relatively high cost of maintaining small accounts, the
Fund reserves
the right to redeem shares in any account for their then-current
value (which
will be promptly paid to the shareholder) if at any time the total
investment in
such account drops below $500 because of redemptions, except
in the case of
accounts established for monthly automatic investments and
certain payroll
savings programs, Automatic Exchange Plan accounts and tax-
deferred retirement
plans, for which there is a lower minimum investment
requirement. See
"Purchases." Shareholders will be notified that the value of
their account is
less than the minimum investment requirement and allowed 60
days to make an
additional investment before the redemption is processed.
No CDSC will be
imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders to the
greatest extent
possible against fraud, the Fund requires in certain
instances as indicated
above that the shareholder's signature be guaranteed. In
these cases the
shareholder's signature must be guaranteed by an eligible bank,
broker, dealer,
credit union, national securities exchange, registered securities
association,
clearing agency or savings association. Signature guarantees
shall be accepted
in accordance with policies established by the Shareholder
Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE -- Investments ("Direct
Purchases") will be
subject to a CDSC for a period of 12 months (in the case of
purchases of $1
million or more of Class A shares) or six years (in the case of
purchases of
Class B shares). Purchases of Class A shares made during a
calendar month,
regardless of when during the month the investment occurred, will
age one month
on the last day of the month and each subsequent month. Class B
shares purchased
on or after January 1, 1993 will be aggregated on a calendar
month basis -- all
transactions made during a calendar month, regardless of when
during the month
they have occurred, will age one year at the close of business
on the last day
of such month in the following calendar year and each subsequent
year. For Class
B shares of the Fund purchased prior to January 1, 1993,
transactions will be
aggregated on a calendar year basis -- all transactions made
during a calendar
year, regardless of when during the year they have occurred,
will age one year
at the close of business on December 31 of that year and each
subsequent year.
At the time of a redemption, the amount by which the value of a
shareholder's
account for a particular class represented by Direct Purchases
exceeds the sum
of the six calendar year aggregations (12 months in the case of
purchases of $1
million or more of Class A shares) of Direct Purchases may be
redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on
additional shares
acquired through the automatic reinvestment of dividends or
capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular
class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of
redemption equal
to the then-current value of Reinvested Shares is not subject to
the CDSC, but
(iii) any amount of the redemption in excess of the
aggregate of the
then-current value of Reinvested Shares and the Free Amount
is subject to a
CDSC. The CDSC will first be applied against the amount of
Direct Purchases
which will result in any such charge being imposed at the lowest
possible rate.
The CDSC to be imposed upon redemptions will be calculated
as set forth in
"Purchases" above.
The applicability of the CDSC will be unaffected by exchanges
or transfers of
registration, except that, with respect to transfers of
registration to an IRA
rollover account, the CDSC will be waived if the shares being
reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class
A and Class B
shares 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
plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan
provides that the
Fund will pay MFD a distribution/service fee aggregating up
to (but not
necessarily all of) 0.35% of the average daily net assets
attributable to Class
A shares annually in order that MFD may pay expenses on
behalf of the Fund
related to the distribution and servicing of Class A shares. The
expenses to be
paid by MFD on behalf of the Fund include a service fee to
securities dealers
which enter into a sales agreement with MFD of up to 0.25%
per annum of the
Fund's average daily net assets attributable to Class A shares
that are owned by
investors for whom such securities dealer is the holder or
dealer of record.
This fee is intended to be partial consideration for all
personal services
and/or account maintenance services rendered by the dealer with
respect to Class
A shares. MFD may from time to time reduce the amount of the
service fee paid
for shares sold prior to a certain date. MFD may also retain a
distribution fee
of 0.10% per annum of the Fund's average daily net assets
attributable to Class
A shares as partial consideration for services performed and
expenses incurred
in the performance of MFD's obligations under its distribution
agreement with
the Fund. MFD, however, is currently waiving this 0.10% per annum
distribution
fee and will not accept future payments of this fee unless it
first obtains the
approval of the Trust's Board of Trustees. In addition, to the
extent that the
aggregate of the foregoing fees does not exceed 0.35% per annum
of the average
daily net assets of the Fund attributable to Class A
shares, the Fund is
permitted to pay other distribution-related expenses, including
commissions to
dealers and payments to wholesalers employed by MFD for sales
at or above a
certain dollar level. Fees payable under the Class A
Distribution Plan are
charged to, and therefore reduce, income allocated to Class A
shares. Service
fees may be reduced for a securities dealer that is the
holder or dealer of
record for an investor who owns shares of the Fund having a 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 Class A
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.
Certain banks and other financial institutions that have agency
agreements with
MFD will receive service fees that are the same as service fees to
dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan
provides that the
Fund will pay MFD a daily distribution fee equal on an annual
basis to 0.75% of
the Fund's average daily net assets attributable to Class B
shares and will pay
MFD a service fee of up to 0.25% per annum of the Fund's
average daily net
assets attributable to Class B shares (which MFD will in turn pay
to securities
dealers which enter into a sales agreement with MFD at a rate of
up to 0.25% per
annum of the Fund's average daily net assets attributable to
Class B shares
owned by investors for whom that securities dealer is the
holder or dealer of
record). This service fee is intended to be additional
consideration for all
personal services and/or account maintenance services rendered
by the dealer
with respect to Class B shares. Fees payable under the Class B
Distribution Plan
are charged to, and therefore reduce, income allocated to Class
B shares. The
Class B Distribution Plan also provides that MFD will
receive all CDSCs
attributable to Class B shares (see "Redemptions and Repurchases"
above), which
do not reduce the distribution fee. 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 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. Therefore, the total amount paid to a dealer
upon the sale of
shares is 4.00% of the purchase price of the shares (commission
rate of 3.75%
plus service fee equal to 0.25% of the purchase price).
Dealers will become
eligible for additional service fees with respect to such shares
commencing in
the thirteenth month following the purchase. 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 Class B
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. The purpose of the distribution
payments to MFD under
the Class B Distribution Plan is to compensate MFD for its
distribution services
to the Fund. Since MFD's compensation is not directly tied to its
expenses, the
amount of compensation received by MFD during any year may be
more or less than
its actual expenses. For this reason, this type of distribution
fee arrangement
is characterized by the staff of the SEC as being of the
"compensation" variety.
However, the Fund is not liable for any expenses incurred by
MFD in excess of
the amount of compensation it receives. The expenses incurred by
MFD, including
commissions to dealers, are likely to be greater than the
distribution fees for
the next several years, but thereafter such expenses may be less
than the amount
of the distribution fees. Certain banks and other financial
institutions that
have agency agreements with MFD will receive agency transaction
and service fees
that are the same as commissions and service fees to dealers.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment
income to its
shareholders as dividends on an annual basis. In determining the
net investment
income available for distributions, the Fund may rely on
projections of its
anticipated net investment income over a longer term, rather than
its actual net
investment income for the period. The Fund may make one or more
distributions
during the calendar year to its shareholders from any long-term
capital gains,
and may also make one or more distributions during the
calendar year to its
shareholders from short-term capital gains. Shareholders may
elect to receive
dividends and capital gain distributions in either cash or
additional shares of
the same class with respect to which a distribution is made.
See "Tax Status"
and "Shareholder Services -- Distribution Options" below.
Distributions paid by
the Fund with respect to Class A shares will generally be
greater than those
paid with respect to Class B shares because expenses
attributable to Class B
shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of
the Trust for
federal income tax purposes. In order to minimize the taxes
the Fund would
otherwise be required to pay, the Fund intends to qualify
each year as a
"regulated investment company" under Subchapter M of the
Code, and to make
distributions to its shareholders in accordance with the timing
requirements
imposed by the Code. It is expected that the Fund will not be
required to pay
entity level federal income or excise taxes, although foreign-
source income
earned by the Fund may be subject to foreign withholding taxes.
Shareholders of
the Fund normally will have to pay federal income taxes (and any
state or local
taxes), on the dividends and capital gain distributions they
receive from the
Fund, whether paid in cash or additional shares. A portion of
the dividends
received from the Fund (but none of the Fund's capital gain
distributions) may
qualify for the dividends-received deduction for corporations.
A statement setting forth the federal income tax status of all
dividends and
distributions for each calendar year, including the portion
taxable as ordinary
income, the portion taxable as long-term capital gain, the
portion, if any,
representing a return of capital (which is free of current taxes
but results in
a basis reduction) and the amount, if any, of federal income tax
withheld will
be sent to each shareholder promptly after the end of such
calendar year.
Fund distributions will reduce the Fund's net asset
value per share.
Shareholders who buy shares shortly before the Fund makes a
distribution may
thus pay the full price for the shares and then effectively
receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at a
rate of 30% on
dividends and certain other payments that are subject to such
withholding and
are made to persons who are neither citizens nor residents
of the U.S.,
regardless of whether a lower rate may be permitted under an
applicable law or
treaty. The Fund is also required in certain circumstances to
apply backup
withholding of 31% on taxable dividends and redemption
proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor
a resident of
the U.S.) who does not furnish to the Fund certain
information and
certifications or who is otherwise subject to backup
withholding. However,
backup withholding will not be applied to payments which
have had 30%
withholding taken. Prospective investors should read the Account
Application for
information regarding backup withholding of federal income
tax and should
consult their own tax advisers as to the tax consequences of an
investment in
the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is
determined each day
during which the Exchange is open for trading. This
determination is made once
each day as of the close of regular trading on the Exchange by
deducting the
amount of the liabilities attributable to the class from the value
of the Fund's
assets attributable to the class and dividing the difference by
the number of
shares of the class outstanding. Assets in the Fund's portfolio
are valued on
the basis of their current values or otherwise at their
fair values, as
described in the Statement of Additional Information. All
investments and assets
are expressed in U.S. dollars based upon current currency
exchange rates. The
net asset value of each class of shares is effective for orders
received by the
dealer prior to its calculation and received by MFD prior to the
close of that
business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of four series of the Trust, has two classes of
shares, entitled
Class A and Class B Shares of Beneficial Interest (without par
value). The Trust
has reserved the right to create and issue additional classes
and series of
shares, in which case each class of shares of a series would
participate equally
in the earnings, dividends and assets attributable to that
class of that
particular series. Shareholders are entitled to one vote for each
share held and
shares of each series would be entitled to vote separately to
approve investment
advisory agreements or changes in investment restrictions, but
shares of all
series would vote together in the election of Trustees and
selection of
accountants. Additionally, each class of shares of a series will
vote separately
on any material increases in the fees under its Distribution
Plan or on any
other matter that affects solely that class of shares, but will
otherwise vote
together with all other classes of shares of the series on all
other matters.
The Trust does not intend to hold annual shareholder meetings.
The Declaration
of Trust provides that a Trustee may be removed from office in
certain instances
(see "Description of Shares, Voting Rights and Liabilities" in
the Statement of
Additional Information).
Each share of a class of the Fund represents an equal
proportionate interest in
the Fund with each other class share, subject to the
liabilities of the
particular class. Shares have no pre-emptive or conversion rights
(except as set
forth above in "Purchases -- Conversion of Class B Shares").
Shares are fully
paid and non-assessable. Should the Fund be liquidated,
shareholders of each
class are entitled to share pro rata in the net assets
attributable to that
class available for distribution to shareholders. Shares will
remain on deposit
with the Shareholder Servicing Agent and certificates will not be
issued except
in connection with pledges and assignments and in certain
other limited
circumstances.
The Trust is an entity of the type commonly known as a
"Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may,
under certain
circumstances, be held personally liable as partners for its
obligations.
However, the risk of a shareholder incurring financial loss
on account of
shareholder liability is limited to circumstances in which
both inadequate
insurance existed (e.g., fidelity bonding and errors and
omissions insurance)
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return
quotations for
each class of shares and may also quote fund rankings in the
relevant fund
category from various sources, such as the Lipper Analytical
Services, Inc. and
Wiesenberger Investment Companies Service. Total rate of return
quotations will
reflect the average annual percentage change over stated periods
in the value of
an investment in a class of shares of the Fund made at the
maximum public
offering price of shares of that class with all distributions
reinvested and
which, if quoted for periods of six years or less, will give
effect to the
imposition of the CDSC assessed upon redemptions of the Fund's
Class B shares.
Such total rate of return quotations may be accompanied by
quotations which do
not reflect the reduction in value of the initial investment
due to the sales
charge or the deduction of a CDSC, and which will thus be
higher. The Fund's
total rate of return quotations are based on historical
performance and are not
intended to indicate future performance. Total rate of return
reflects all
components of investment return over a stated period of
time. The Fund's
quotations may from time to time be used in advertisements,
shareholder reports
or other communications to shareholders. For a discussion of the
manner in which
the Fund will calculate its total rate of return, see the
Statement of
Additional Information. For further information about the Fund's
performance for
the fiscal year ended November 30, 1994, please see the Fund's
Annual Report. A
copy of the Annual Report may be obtained without charge by
contacting the
Shareholder Servicing Agent (see back cover for address and
phone number). In
addition to information provided in shareholder reports, the
Fund may, in its
discretion, from time to time, make a list of all or a portion
of its holdings
available to investors upon request.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services
described
below or concerning other aspects of the Fund should contact
the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder
will receive
confirmation statements showing the transaction activity in his
account. At the
end of each calendar year, each shareholder will receive income
tax information
regarding reportable dividends and capital gain distributions for
that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available
to all accounts
(except Systematic Withdrawal Plan accounts) and may be
changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in
additional
shares. This option will be assigned if no other option is
specified;
-- Dividends in cash; capital gain distributions reinvested in
additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in
additional full and
fractional shares of the same class of shares at the net asset
value in effect
at the close of business on the record date. Dividends and
capital gain
distributions in amounts less than $10 will automatically be
reinvested in
additional shares of the Fund. If a shareholder has elected to
receive dividends
and/or capital gain distributions in cash and the postal or
other delivery
service is unable to deliver checks to the shareholder's address
of record, such
shareholder's distribution option will automatically be converted
to having all
dividends and other distributions reinvested in additional
shares. Any request
to change a distribution option must be received by the
Shareholder Servicing
Agent by the record date for a dividend or distribution in order
to be effective
for that dividend or distribution. No interest will
accrue on amounts
represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of
shareholders, the
Fund makes available the following programs designed to enable
shareholders to
add to their investment in an account with the Fund or withdraw
from it with a
minimum of paper work. The programs involve no extra charge to
shareholders
(other than a sales charge in the case of certain Class A share
purchases) and
may be changed or discontinued at any time by a shareholder or the
Fund.
LETTER OF INTENT: If a shareholder (other than a group
purchaser as
described in the Statement of Additional Information)
anticipates purchasing
$50,000 or more of Class A shares of the Fund alone or in
combination with
shares of any class of other MFS Funds or MFS Fixed Fund
within a 13-month
period (or 36-month period for purchases of $1 million or more),
the shareholder
may obtain such shares at the same reduced sales charge as
though the total
quantity were invested in one lump sum, subject to escrow
agreements and the
appointment of an attorney for redemptions from the escrow
amount if the
intended purchases are not completed, by completing the Letter of
Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for
cumulative quantity
discounts on purchases of Class A shares when his new investment,
together with
the current offering price value of all holdings of any class of
shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular
class of the Fund
may be sold at net asset value (and without any applicable
CDSC) through the
automatic reinvestment of dividend and capital gain distributions
from the same
class of another MFS Fund. Furthermore, distributions made by
the Fund may be
automatically invested at net asset value (and without any
applicable CDSC) in
shares of the same class of another MFS Fund, if shares of
such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct
the Shareholder
Servicing Agent to send him (or anyone he designates) regular
periodic payments,
as designated on the Account Application and based upon the
value of his
account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at
least $100, except in certain limited circumstances. The
aggregate withdrawals
of Class B shares in any year pursuant to a SWP will not be
subject to a CDSC
and are generally limited to 10% of the value of the account at
the time of the
establishment of the SWP. The CDSC will not be waived in
the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or
more may be made
through a shareholder's checking account twice monthly, monthly
or quarterly.
Required forms are available from the Shareholder Servicing Agent
or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account
balances of at least
$5,000 in any MFS Fund may exchange their shares for the same
class of shares of
other MFS Funds under the Automatic Exchange Plan. The Automatic
Exchange Plan
provides for automatic monthly or quarterly exchanges of
funds from the
shareholder's account in an MFS Fund for investment in the same
class of shares
of other MFS Funds selected by the shareholder. Under the
Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four
different funds.
A shareholder should consider the objectives and policies of a
fund and review
its prospectus before electing to exchange money into such
fund through the
Automatic Exchange Plan. No transaction fee is imposed in
connection with
exchange transactions under the Automatic Exchange Plan. However,
exchanges of
shares of MFS Money Market Fund, MFS Government Money Market
Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable
sales charge.
For federal and (generally) state income tax purposes, an exchange
is treated as
a sale of the shares exchanged and, therefore, could result in a
capital gain or
loss to the shareholder making the exchange. See the Statement
of Additional
Information for further information concerning the Automatic
Exchange Plan.
Investors should consult their tax advisers for information
regarding the
potential capital gain and loss consequences of transactions under
the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic
purchases of shares
regardless of fluctuating share offering prices, a shareholder
should consider
his financial ability to continue his purchases through
periods of low price
levels. Maintaining a dollar cost averaging program
concurrently with a
withdrawal program could be disadvantageous because of the
sales charges
included in share purchases in the case of Class A shares and
because of the
assessment of the CDSC for certain share redemptions in the
case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be
purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA
plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing
plans.
Investors should consult with their tax adviser before
establishing any of the
tax-deferred retirement plans described above.
--------------
The Fund's Statement of Additional Information, dated April 1,
1995, contains
more detailed information about the Trust and the Fund,
including, but not
limited to, information related to (i) investment objective,
policies and
restrictions, including the purchase and sale of options,
Futures Contracts,
Options on Futures Contracts, Forward Contracts and
Options on Foreign
Currencies, (ii) the Trustees, officers and investment adviser,
(iii) portfolio
trading, (iv) the Fund's shares, including rights and
liabilities of
shareholders, (v) tax status of dividends and distributions,
(vi) the Class A
and Class B Distribution Plans, (vii) the method used to calculate
total rate of
return quotations and (viii) various services and privileges
provided by the
Fund for the benefit of its shareholders, including additional
information with
respect to the exchange privilege.
APPENDIX
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 fluctuations of
protective elements
may be of greater amplitude or there may be other elements
present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are
to be considered as upper medium grade obligations. Factors
giving security to
principal and interest are considered adequate but elements may be
present which
suggest a susceptibility to impairment some time in the future.
BAA: Bonds which are rated Baa are considered as medium grade
obligations, i.e.,
they are neither highly protected nor poorly secured. Interest
payments and
principal security appear adequate for the present but
certain protective
elements may be lacking or may be characteristically unreliable
over any great
length of time. Such bonds lack outstanding investment
characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative
elements; their
future cannot be considered as well-assured. Often the
protection of interest
and principal payments may be very moderate and thereby not
well safeguarded
during both good and bad times over the future. Uncertainty
of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of
the desirable
investment. Assurance of interest and principal payments or of
maintenance of
other terms of the contract over any long period of time may be
small.
CAA: Bonds which are rated Caa are of poor standing. Such issues
may be in
default or there may be present elements of danger with respect to
principal
or interest.
CA: Bonds which are rated Ca represent obligations which are
speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds
and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a
rating has
been suspended or withdrawn, it may be for reasons unrelated to
the quality of
the issue.
Should no rating be assigned, the reason may be one of the
following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or
companies that
are not rated as a matter of policy;
3. there is a lack of essential data pertaining to the issue
or issuer;
and
4. the issue was privately placed, in which case the rating is
not
published in Moody's publications.
Suspension or withdrawal may occur if new and material
circumstances arise, the
effects of which preclude satisfactory analysis; if there is no
longer available
reasonable up-to-date data to permit a judgment to be formed;
if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P's.
Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and
repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and
repay principal
although it is somewhat more susceptible to the adverse effects
of changes in
circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity
to pay interest
and repay principal. Whereas it normally exhibits
adequate protection
parameters, adverse economic conditions or changing
circumstances are more
likely to lead to a weakened capacity to pay interest and repay
principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to
default than other
speculative issues. However, it faces major ongoing uncertainties
or exposure to
adverse business, financial, or economic conditions which
could lead to
inadequate capacity to meet timely interest and principal
payments. The BB
rating category is also used for debt subordinated to senior
debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but
currently has the
capacity to meet interest payments and principal repayments.
Adverse business,
financial or economic conditions will likely impair capacity or
willingness to
pay interest and repay principal. The B rating category is also
used for debt
subordinated to senior debt that is assigned an actual or
implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability
to default, and
is dependent upon favorable business, financial and economic
conditions to meet
timely payment of interest and repayment of principal. In the
event of adverse
business, financial, or economic conditions, it is not
likely to have the
capacity to pay interest and repay principal. The CCC rating
category is also
used for debt subordinated to senior debt that is assigned an
actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to
senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to
senior debt which
is assigned an actual or implied CCC- debt rating. The C rating
may be used to
cover a situation where a bankruptcy petition has been filed,
but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no
interest is being
paid.
D: Debt rated D is in payment default The D rating category
is used when
interest payments or principal payments are not made on the date
due even if the
applicable grace period has not expired, unless S&P believes that
such payments
will be made during such grace period. The D rating also will be
used upon the
filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be
modified by the
addition of a plus or minus sign to show relative standing
within the major
categories.
NR: Indicates that no public rating has been requested,
that there is
insufficient information on which to base a rating or that S&P
does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICES, INC.
AAA: Bonds considered to be investment grade and of the highest
credit quality.
The obligor has an exceptionally strong ability to pay
interest and repay
principal which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds considered to be investment grade and of very high
credit quality. The
obligor's ability to pay interest and repay principal is very
strong although
not quite as strong as bonds rated "AAA". Because bonds rated in
the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future
developments, short-term debt of these issuers is generally rated
"F- 1+".
A: Bonds considered to be investment grade and of high credit
quality. The
obligor's ability to pay interest and repay principal is
considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory
credit quality.
The obligor's ability to pay interest and repay principal is
considered to be
adequate. Adverse changes in economic conditions, however, are
more likely to
have adverse impact on these bonds, and therefore impair timely
payment. The
likelihood that the ratings of these bonds will fall below
investment grade is
higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to
pay interest and
repay principal may be affected over time by adverse economic
changes. However,
business and financial alternatives can be identified which
could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in
this class are
currently meeting debt service requirements, the probability of
continued timely
payment of principal and interest reflects the obligor's
limited margin of
safety and the need for reasonable business and economic activity
throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied,
may lead to default. The ability to meet obligations requires an
advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or
principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a
rating symbol to
indicate the relative position of a credit within the rating
category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful
completion of
a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of
information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures
or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to
furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify
investors of an
occurrence that is likely to result in a rating change and the
likely direction
of such chance. These are designated as "Positive",
indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving",
where ratings may
be raised or lowered. FitchAlert is relatively short-term,
and should be
resolved within 12 months.
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.
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), for a
definite period
of time, earn a specified rate of return and are normally
negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit
instruments used to
finance the import, export, transfer or storage of goods.
They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by
corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by
corporations in order
to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P or Fitch and Moody's highest commercial paper
ratings:
The rating "A" is the highest commercial paper rating assigned by
S&P or Fitch,
and issues so rated are regarded as having the greatest
capacity for timely
payment. Issues in the "A" category are delineated with the
numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation
indicates that
the degree of safety regarding timely payment is either
overwhelming or very
strong. Those A-1 issues determined to possess
overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating
assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1
repayment capacity
will normally be evidenced by the following characteristics: (1)
leading market
positions in well established industries; (2) high rates of
return on funds
employed; (3) conservative capitalization structure with
moderate reliance on
debt and ample asset protection; (4) broad margins in earnings
coverage of fixed
financial charges and high internal cash generation; and (5)
well established
access to a range of financial markets and assured sources
of alternate
liquidity.
<PAGE>
[MFS Logo]
THE FIRST NAME IN
MUTUAL FUNDS
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000 MFS(R) EMERGING
GROWTH FUND
Distributor Prospectus
MFS Fund Distributors, Inc. April 1, 1995
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address
P.O. Box 2281
Boston, MA 02107-9906
Independent Accountants
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[MFS Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) EMERGING GROWTH FUND
500 Boylston Street
Boston, MA 02116
MEG-1-4/95/362M 7/207
<PAGE>
MFS EMERGING GROWTH FUND
(a series of MFS SERIES TRUST II)
Supplement to be affixed to the current
Prospectus for distribution in Iowa
For shares designated as Class B purchased after September 1,
1993, a contingent
deferred sales charge declining from 4% to 0% will be imposed
if the investor
redeems within six years from the date of purchase. In addition,
the Class is
subject to an annual distribution and service fee of 1% of its
average daily net
assets.
The date of this Supplement is April 1, 1995.
<PAGE>
[MFS Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) EMERGING STATEMENT OF
GROWTH FUND ADDITIONAL
INFORMATION
(A member of the MFS Family of Funds(R)) April 1, 1995
- ------------------------------------------------------------------
- ------------
Page
- ----
1. Definitions
.................................................... 2
2. Investment Techniques
.......................................... 2
3. Investment Restrictions
........................................ 12
4. Management of the Fund
......................................... 13
Trustees
...................................................... 13
Officers
...................................................... 13
Investment Adviser
............................................ 14
Custodian
..................................................... 14
Shareholder Servicing Agent
................................... 15
Distributor
................................................... 15
5. Portfolio Transactions and Brokerage Commissions
............... 15
6. Shareholder Services
........................................... 17
Investment and Withdrawal Programs
............................ 17
Exchange Privilege
............................................ 18
Tax-Deferred Retirement Plans
................................. 19
7. Tax Status
..................................................... 19
8. Determination of Net Asset Value; Performance Information
...... 20
9. Distribution Plans
............................................. 22
10. Description of Shares, Voting Rights and Liabilities
........... 24
11. Independent Accountants and Financial Statements
............... 24
Appendix A
..................................................... 25
MFS EMERGING GROWTH FUND
A Series of MFS Series Trust II
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets
forth information
which may be of interest to investors but which is not
necessarily included in
the Fund's Prospectus, dated April 1, 1995. This SAI
should be read in
conjunction with the Prospectus, a copy of which may be obtained
without charge
by contacting the Shareholder Servicing Agent (see back cover
for address and
phone number).
This SAI is NOT a prospectus and is authorized for distribution
to prospective
investors only if preceded or accompanied by a current prospectus.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS Emerging Growth Fund, a
diversified series of
MFS Series Trust II (the
"Trust"), a
Massachusetts business trust. The
Trust was known
as MFS Lifetime Emerging Growth
Fund until August
1, 1993 and was known as Lifetime
Emerging Growth
Trust prior to August 3, 1992. The
MFS Emerging
Growth Fund is the successor to
the MFS Lifetime
Emerging Growth Fund, which was
reorganized as a
series of the Trust on September 7,
1993.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware
corporation.
"Prospectus" -- The Prospectus, dated April 1,
1995, of the Fund.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the
Prospectus. In
addition, certain of the Fund's investment policies are
described in greater
detail below.
LENDING OF SECURITIES
The Fund may seek to increase its income by lending portfolio
securities. Such
loans will usually be made only to member banks of the Federal
Reserve System
and to member firms (and subsidiaries thereof) of the New York
Stock Exchange
(the "Exchange") and would be required to be secured continuously
by collateral
in cash, cash equivalents, or U.S. Government 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
usually not exceed
five days). During the existence of a loan, the Fund would
continue to receive
the equivalent of the interest or dividends paid by the issuer on
the securities
loaned and would also receive compensation based on
investment of the
collateral. The Fund would not, however, have the right to vote
any securities
having voting rights during the existence of the loan, but would
call the loan
in anticipation of an important vote to be taken among holders of
the securities
or of the giving or withholding of their consent on a material
matter affecting
the investment. As with other extensions of credit, there are
risks of delay in
recovery or even loss of rights in the collateral should the
borrower fail
financially. However, the loans would be made only to firms
deemed by the
Adviser to be of good standing, and when, in the judgment of the
Adviser, the
consideration which could be earned currently from securities
loans of this type
justifies the attendant risk. If the Adviser determines to
make securities
loans, it is not intended that the value of the securities
loaned would exceed
20% of the value of the Fund's total assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a
"forward delivery"
basis. It is expected that, under normal circumstances, the
Fund will take
delivery of such securities. When the Fund commits to purchase a
security on a
"when-issued" or on a "forward delivery" basis, it will set
up procedures
consistent with the General Statement of Policy of the
Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that
policy currently
recommends that an amount of the Fund's assets equal to the
amount of the
purchase be held aside or segregated to be used to pay for the
commitment, the
Fund will always have cash, short-term money market instruments
or high quality
debt securities sufficient to cover any commitments or to limit
any potential
risk. However, although the Fund does not intend to make such
purchases for
speculative purposes and intends to adhere to SEC policies,
purchases of
securities on such bases may involve more risk than other types
of purchases.
For example, the Fund may have to sell assets which have been set
aside in order
to meet redemptions. Also, if the Fund determines it is
necessary to sell the
"when-issued" or "forward delivery" securities before delivery,
it may incur a
loss because of market fluctuations since the time the
commitment to purchase
such securities was made. When the time comes to pay for
"when-issued" or
"forward delivery" securities, the Fund will meet its
obligations from the
then-available cash flow on the sale of securities, or,
although it would not
normally expect to do so, from the sale of the "when- issued"
or "forward
delivery" securities themselves (which may have a value greater or
less than the
Fund's payment obligation).
CORPORATE ASSET-BACKED SECURITIES
As described in the Prospectus, the Fund may invest in corporate
asset-backed
securities. These securities, issued by trusts and special purpose
corporations,
are backed by a pool of assets, such as credit card and
automobile loan
receivables, representing the obligations of a number of different
parties.
Corporate asset-backed securities present certain risks. For
instance, in the
case of credit card receivables, these securities may not have
the benefit of
any security interest in the related collateral. Credit card
receivables are
generally unsecured and the debtors are entitled to the
protection of a number
of state and federal consumer credit laws, many of which give
such debtors the
right to set off certain amounts owed on the credit cards,
thereby reducing the
balance due. Most issuers of automobile receivables permit the
servicers to
retain possession of the underlying obligations. If the
servicer were to sell
these obligations to another party, there is a risk that the
purchaser would
acquire an interest superior to that of the holders of the
related automobile
receivables. In addition, because of the large number of vehicles
involved in a
typical issuance and technical requirements under state laws,
the trustee for
the holders of the automobile receivables may not have a
proper security
interest in all of the obligations backing such receivables.
Therefore, there is
the possibility that recoveries on repossessed collateral
may not, in some
cases, be available to support payments on these securities.
The underlying
assets (e.g., loans) are also subject to prepayments which
shorten the
securities" weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a
pool of assets
representing the obligations of a number of different parties.
To lessen the
effect of failures by obligors on underlying assets to make
payments, the
securities may contain elements of credit support which
fall into two
categories: (i) liquidity protection and (ii) protection
against losses
resulting from ultimate default by an obligor on the
underlying assets.
Liquidity protection refers to the provision of advances,
generally by the
entity administering the pool of assets, to ensure that the
receipt of payments
on the underlying pool occurs in a timely fashion. Protection
against losses
resulting from ultimate default ensures payment through
insurance policies or
letters of credit obtained by the issuer or sponsor from third
parties. The Fund
will not pay any additional or separate fees for credit support.
The degree of
credit support provided for each issue is generally based
on historical
information respecting the level of credit risk associated with
the underlying
assets. Delinquency or loss in excess of that anticipated or
failure of the
credit support could adversely affect the return on an
investment in such a
security.
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund may enter into
repurchase agreements
with sellers who are member firms (or subsidiaries thereof) of
the Exchange,
members of the Federal Reserve System, recognized primary
U.S. Government
securities dealers or institutions which the Adviser has
determined to be of
comparable creditworthiness. The securities that the Fund
purchases and holds
through its agent are U.S. Government securities, the values,
including accrued
interest, of which are equal to or greater than the repurchase
price agreed to
be paid by the seller. The repurchase price may be higher than
the purchase
price, the difference being income to the Fund, or the purchase
and repurchase
prices may be the same, with interest at a standard rate
due to the Fund
together with the repurchase price on repurchase. In either case,
the income to
the Fund is unrelated to the interest rate on the U.S. Government
securities.
The repurchase agreement provides that in the event the seller
fails to pay the
price agreed upon on the agreed upon delivery date or upon
demand, as the case
may be, the Fund will have the right to liquidate the securities.
If at the time
the Fund is contractually entitled to exercise its right to
liquidate the
securities, the seller is subject to a proceeding under the
bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's
exercise of its
right to liquidate the securities may be delayed and result in
certain losses
and costs to the Fund. The Fund has adopted and follows
procedures which are
intended to minimize the risks of repurchase agreements. For
example, the Fund
only enters into repurchase agreements after the Adviser has
determined that the
seller is creditworthy, and the Adviser monitors the seller's
creditworthiness
on an ongoing basis. Moreover, under such agreements, the
value, including
accrued interest, of the securities (which are marked to market
every business
day) is required to be greater than the repurchase price, and
the Fund has the
right to make margin calls at any time if the value of the
securities falls
below the agreed upon margin.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
As described in the Prospectus, the Fund may purchase loan
participations and
other direct indebtedness. In purchasing a loan participation, the
Fund acquires
some or all of the interest of a bank or other lending
institution in a loan to
a corporate borrower. Many such loans are secured,
although some may be
unsecured. Such loans may be in default at the time of purchase.
Loans and other
direct indebtedness 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 or other direct indebtedness would satisfy
the corporate
borrower's obligation, or that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to
finance internal
growth, mergers, acquisitions, stock repurchases, leveraged buy-
outs and other
corporate activities. Such loans and other direct
indebtedness 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 and other
direct indebtedness may be structured as a novation, pursuant to
which the Fund
would assume all of the rights of the lending institution in a
loan, or as an
assignment, pursuant to which the Fund would purchase an
assignment of a portion
of a lender's interest in a loan or other direct indebtedness
either directly
from the lender or through an intermediary. The Fund may also
purchase trade or
other claims against companies, which generally represent
money owed by the
company to a supplier of goods or services. These claims may
also be purchased
at a time when the company is in default.
Certain of the loan participations and 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 loan participations
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 on to 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
participation for
purposes of certain investment restrictions pertaining to the
diversification of
the Fund's portfolio investments. The highly leveraged nature of
many such loans
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. For example, if a loan or other direct
indebtedness is
foreclosed, the Fund could become part owner of any collateral,
and would bear
the costs and liabilities associated with owning and
disposing of the
collateral. In addition, it is conceivable that under emerging
legal theories of
lender liability, the Fund could be held liable as a co-lender.
It is unclear
whether loans and other forms of direct indebtedness offer
securities law
protections against fraud and misrepresentation. In the absence
of definitive
regulatory guidance, the Fund relies on the Adviser's research in
an attempt to
avoid situations where fraud and misrepresentation could
adversely affect the
Fund. In addition, loan participations and other direct
investments may not be
in the form of securities or may be subject to restrictions on
transfer, and
only limited opportunities may exist to resell such instruments.
As a result,
the Fund may be unable to sell such investments at an opportune
time or may have
to resell them at less than fair market value. To the extent
that the Adviser
determines that any such investments are illiquid, the Fund will
include them in
the investment limitations described below.
FOREIGN SECURITIES
The Fund may invest up to 25% (and expects generally to invest
between 0% to
10%) of its total assets in foreign securities (not
including American
Depositary Receipts). As discussed in the Prospectus,
investing in foreign
securities generally presents a greater degree of risk than
investing in
domestic securities due to possible exchange rate fluctuations,
less publicly
available information, more volatile markets, less securities
regulation, less
favorable tax provisions, war or expropriation. As a result of
its investments
in foreign securities, the Fund may receive interest or dividend
payments, or
the proceeds of the sale or redemption of such securities,
in the foreign
currencies in which such securities are denominated.
Under certain
circumstances, such as where the Adviser believes that the
applicable exchange
rate is unfavorable at the time the currencies are received
or the Adviser
anticipates, for any other reason, that the exchange rate will
improve, the Fund
may hold such currencies for an indefinite period of time. The
Fund may also
hold foreign currency in anticipation of purchasing foreign
securities. While
the holding of currencies will permit the Fund to take
advantage of favorable
movements in the applicable exchange rate, such strategy also
exposes the Fund
to risk of loss if exchange rates move in a direction adverse
to the Fund's
position. Such losses could reduce any profits or increase any
losses sustained
by the Fund from the sale or redemption of securities and
could reduce the
dollar value of interest or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS
The Fund may invest in American Depositary Receipts
("ADRs") which are
certificates issued by a U.S. depository (usually a bank) and
represent a
specified quantity of shares of an underlying non-U.S. stock on
deposit with a
custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored
ADR is issued by a depository which has an exclusive
relationship with the
issuer of the underlying security. An unsponsored ADR may be
issued by any
number of U.S. depositories. The Fund may invest in either type of
ADR. Although
the U.S. investor holds a substitute receipt of ownership
rather than direct
stock certificates, the use of the depository receipts in the
United States can
reduce costs and delays as well as potential currency
exchange and other
difficulties. The Fund may purchase securities in local
markets and direct
delivery of these ordinary shares to the local depository of an
ADR agent bank
in the foreign country. Simultaneously, the ADR agents create
a certificate
which settles at the Fund's custodian in five days. The Fund
may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer
of the security
underlying an ADR is generally not subject to the same reporting
requirements in
the United States as a domestic issuer. Accordingly the
information available to
a U.S. investor will be limited to the information the
foreign issuer is
required to disclose in its own country and the market value of
an ADR may not
reflect undisclosed material information concerning the issuer of
the underlying
security. ADRs may also be subject to exchange rate risks if
the underlying
foreign securities are traded in foreign currency.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may
write covered
call and put options and purchase call and put options on
securities. Call and
put options written by the Fund may be covered in the manner set
forth below.
A call option written by the Fund is "covered" if the Fund owns
the security
underlying the call or has an absolute and immediate right to
acquire that
security without additional cash consideration (or for
additional cash
consideration held in a segregated account by its custodian) upon
conversion or
exchange of other securities held in its portfolio. A call
option is also
covered if the Fund holds a call on the same security and in the
same principal
amount as the call written where the exercise price of the
call held (a) is
equal to or less than the exercise price of the call written or
(b) is greater
than the exercise price of the call written if the difference is
maintained by
the Fund in cash, short-term money market instruments or high
quality debt
securities in a segregated account with its custodian. A put
option written by
the Fund is "covered" if the Fund maintains cash, short-term
money market
instruments or high quality debt securities with a value equal
to the exercise
price in a segregated account with its custodian, or else
holds a put on the
same security and in the same principal amount as the put
written where the
exercise price of the put held is equal to or greater than the
exercise price of
the put written or where the exercise price of the put held is
less than the
exercise price of the put written if the difference is maintained
by the Fund in
cash, short-term money market instruments or high quality debt
securities in a
segregated account with its custodian. Put and call options
written by the Fund
may also be covered in such other manner as may be in
accordance with the
requirements of the exchange on which, or the counter party
with which, the
option is traded, and applicable laws and regulations. If
the writer's
obligation is not so covered, it is subject to the risk of the
full change in
value of the underlying security from the time the option is
written until
exercise.
Effecting a closing transaction in the case of a written call
option will permit
the Fund to write another call option on the underlying security
with either a
different exercise price or expiration date or both, or in the
case of a written
put option will permit the Fund to write another put option to
the extent that
the exercise price thereof is secured by deposited cash, short-
term money market
instruments or high quality debt securities. Such transactions
permit the Fund
to generate additional premium income, which will partially
offset declines in
the value of portfolio securities or increases in the cost of
securities to be
acquired. Also, effecting a closing transaction will permit the
cash or proceeds
from the concurrent sale of any securities subject to the option
to be used for
other investments of the Fund, provided that another option on
such security is
not written. If the Fund desires to sell a particular
security from its
portfolio on which it has written a call option, it will
effect a closing
transaction in connection with the option prior to or concurrent
with the sale
of the security.
The Fund will realize a profit from a closing transaction if the
premium paid in
connection with the closing of an option written by the Fund is
less than the
premium received from writing the option, or if the premium
received in
connection with the closing of an option purchased by the Fund is
more than the
premium paid for the original purchase. Conversely, the Fund will
suffer a loss
if the premium paid or received in connection with a closing
transaction is more
or less, respectively, than the premium received or paid in
establishing the
option position. Because increases in the market price of a
call option will
generally reflect increases in the market price of the underlying
security, any
loss resulting from the repurchase of a call option previously
written by the
Fund is likely to be offset in whole or in part by
appreciation of the
underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that
is, the Fund may purchase a security and then write a call option
against that
security. The exercise price of the call the Fund determines
to write will
depend upon the expected price movement of the underlying
security. The exercise
price of a call option may be below ("in-the-money"), equal to
("at- the-money")
or above ("out-of-the-money") the current value of the
underlying security at
the time the option is written. Buy-and-write transactions
using in-the-money
call options may be used when it is expected that the price of
the underlying
security will decline moderately during the option period.
Buy- and-write
transactions using out-of-the-money call options may be used when
it is expected
that the premiums received from writing the call option plus the
appreciation in
the market price of the underlying security up to the exercise
price will be
greater than the appreciation in the price of the underlying
security alone. If
the call options are exercised in such transactions, the Fund's
maximum gain
will be the premium received by it for writing the option,
adjusted upwards or
downwards by the difference between the Fund's purchase price
of the security
and the exercise price, less related transaction costs. If the
options are not
exercised and the price of the underlying security declines, the
amount of such
decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms
of risk/return
characteristics to buy-and-write transactions. If the market
price of the
underlying security rises or otherwise is above the exercise
price, the put
option will expire worthless and the Fund's gain will be limited
to the premium
received, less related transaction costs. If the market price of
the underlying
security declines or otherwise is below the exercise price, the
Fund may elect
to close the position or retain the option until it is exercised,
at which time
the Fund will be required to take delivery of the security at
the exercise
price; the Fund's return will be the premium received from the
put option minus
the amount by which the market price of the security is below
the exercise
price, which could result in a loss. Out-of-the-money, at-
the-money and
in-the-money put options may be used by the Fund in the same
market environments
that call options are used in equivalent buy-and-write
transactions.
The Fund may also write combinations of put and call
options on the same
security, known as "straddles," with the same exercise price
and expiration
date. By writing a straddle, the Fund undertakes a simultaneous
obligation to
sell and purchase the same security in the event that one of
the options is
exercised. If the price of the security subsequently rises
sufficiently above
the exercise price to cover the amount of the premium and
transaction costs, the
call will likely be exercised and the Fund will be
required to sell the
underlying security at a below market price. This loss may be
offset, however,
in whole or part, by the premiums received on the writing of
the two options.
Conversely, if the price of the security declines by a sufficient
amount, the
put will likely be exercised. The writing of straddles will likely
be effective,
therefore, only where the price of the security remains stable
and neither the
call nor the put is exercised. In those instances where one of
the options is
exercised, the loss on the purchase or sale of the underlying
security may
exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to
profit from any
increase in the market value of the underlying security above the
exercise price
of the option. By writing a put option, the Fund assumes the risk
that it may be
required to purchase the underlying security for an exercise
price above its
then current market value, resulting in a capital loss
unless the security
subsequently appreciates in value. The writing of options on
securities will not
be undertaken by the Fund solely for hedging purposes, and could
involve certain
risks which are not present in the case of hedging transactions.
Moreover, even
where options are written for hedging purposes, such
transactions constitute
only a partial hedge against declines in the value of portfolio
securities or
against increases in the value of securities to be acquired, up to
the amount of
the premium.
The Fund may purchase options for hedging purposes or to
increase its return.
Put options may be purchased to hedge against a decline in
the value of
portfolio securities. If such decline occurs, the put options
will permit the
Fund to sell the securities at the exercise price, or to close
out the options
at a profit. By using put options in this way, the Fund will
reduce any profit
it might otherwise have realized in the underlying security by the
amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase
in the price of
securities that the Fund anticipates purchasing in the future. If
such increase
occurs, the call option will permit the Fund to purchase the
securities at the
exercise price, or to close out the options at a profit. The
premium paid for
the call option plus any transaction costs will reduce the
benefit, if any,
realized by the Fund upon exercise of the option, and, unless
the price of the
underlying security rises sufficiently, the option may expire
worthless to the
Fund.
In certain instances, the Fund may enter into options on
U.S. Treasury
securities which provide for periodic adjustment of the strike
price and may
also provide for the periodic adjustment of the premium during
the term of each
such option. Like other types of options, these transactions,
which may be
referred to as "reset" options or "adjustable strike"
options, grant the
purchaser the right to purchase (in the case of a "call") or
sell (in the case
of a "put"), a specified type and series of U.S. Treasury
security at any time
up to a stated expiration date (or, in certain instances, on
such date). In
contrast to other types of options, however, the price at which
the underlying
security may be purchased or sold under a "reset" option is
determined at
various intervals during the term of the option, and such price
fluctuates from
interval to interval based on changes in the market value of
the underlying
security. As a result, the strike price of a "reset" option,
at the time of
exercise, may be less advantageous to the Fund than if the strike
price had been
fixed at the initiation of the option. In addition, the
premium paid for the
purchase of the option may be determined at the termination,
rather than the
initiation, of the option. If the premium is paid at
termination, the Fund
assumes the risk that (i) the premium may be less than the
premium which would
otherwise have been received at the initiation of the option
because of such
factors as the volatility in yield of the underlying Treasury
security over the
term of the option and adjustments made to the strike price of
the option, and
(ii) the option purchaser may default on its obligation to pay
the premium at
the termination of the option.
OPTIONS ON STOCK INDICES -- As noted in the Prospectus, the
Fund may write
(sell) covered call and put options and purchase call and put
options on stock
indices. In contrast to an option on a security, an option on
a stock index
provides the holder with the right but not the obligation to
make or receive a
cash settlement upon exercise of the option, rather than the
right to purchase
or sell a security. The amount of this settlement is equal to (i)
the amount, if
any, by which the fixed exercise price of the option exceeds (in
the case of a
call) or is below (in the case of a put) the closing value of
the underlying
index on the date of exercise, multiplied by (ii) a fixed "index
multiplier."
The Fund may cover call options on stock indices by owning
securities whose
price changes, in the opinion of the Adviser, are expected to
be similar to
those of the underlying index, or by having an absolute and
immediate right to
acquire such securities without additional cash consideration (or
for additional
cash consideration held in a segregated account by its
custodian) upon
conversion or exchange of other securities in its portfolio.
Where the Fund
covers a call option on a stock index through ownership of
securities, such
securities may not match the composition of the index and, in
that event, the
Fund will not be fully covered and could be subject to risk of
loss in the event
of adverse changes in the value of the index. The Fund may
also cover call
options on stock indices by holding a call on the same index
and in the same
principal amount as the call written where the exercise price of
the call held
(a) is equal to or less than the exercise price of the call
written or (b) is
greater than the exercise price of the call written if the
difference is
maintained by the Fund in cash, short-term money market
instruments or high
quality debt securities in a segregated account with its
custodian. The Fund may
cover put options on stock indices by maintaining cash, short-
term money market
instruments or high quality debt securities with a value equal
to the exercise
price in a segregated account with its custodian, or by
holding a put on the
same stock index and in the same principal amount as the put
written where the
exercise price of the put held is equal to or greater than the
exercise price of
the put written or where the exercise price of the put held is
less than the
exercise price of the put written if the difference is maintained
by the Fund in
cash, short-term money market instruments or high quality debt
securities in a
segregated account with its custodian. Put and call options on
stock indices may
also be covered in such other manner as may be in accordance
with the rules of
the exchange on which, or the counterparty with which, the option
is traded and
applicable laws and regulations.
The Fund will receive a premium from writing a put or call
option, which
increases the Fund's gross income in the event the option expires
unexercised or
is closed out at a profit. If the value of an index on which
the Fund has
written a call option falls or remains the same, the Fund will
realize a profit
in the form of the premium received (less transaction costs)
that could offset
all or a portion of any decline in the value of the securities
it owns. If the
value of the index rises, however, the Fund will realize a
loss in its call
option position, which will reduce the benefit of any unrealized
appreciation in
the Fund's stock investments. By writing a put option, the Fund
assumes the risk
of a decline in the index. To the extent that the price changes
of securities
owned by the Fund correlate with changes in the value of the
index, writing
covered put options on indices will increase the Fund's losses in
the event of a
market decline, although such losses will be offset in part
by the premium
received for writing the option.
The Fund may also purchase put options on stock indices to hedge
its investments
against a decline in value. By purchasing a put option on a
stock index, the
Fund will seek to offset a decline in the value of securities it
owns through
appreciation of the put option. If the value of the Fund's
investments does not
decline as anticipated, or if the value of the option does not
increase, the
Fund's loss will be limited to the premium paid for the option
plus related
transaction costs. The success of this strategy will largely
depend on the
accuracy of the correlation between the changes in value of the
index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the
Fund to attempt
to reduce the risk of missing a broad market advance, or an
advance in an
industry or market segment, at a time when the Fund holds
uninvested cash or
short-term debt securities awaiting investment. When purchasing
call options for
this purpose, the Fund will also bear the risk of losing all or a
portion of the
premium paid if the value of the index does not rise. The
purchase of call
options on stock indices when the Fund is substantially fully
invested is a form
of leverage, up to the amount of the premium and related
transaction costs, and
involves risks of loss and of increased volatility similar to
those involved in
purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based"
index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index,
the changes in value of which ordinarily will reflect
movements in the stock
market in general. In contrast, certain options may be based on
narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of
securities of
particular industry groups, such as those of oil and gas
or technology
companies. A stock index assigns relative values to the stocks
included in the
index and the index fluctuates with changes in the market values
of the stocks
so included. The composition of the index is changed periodically.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may
enter into stock
index futures contracts. (Unless otherwise specified, futures
contracts on
indices are referred to as "Futures Contracts.") Such investment
strategies will
be used for hedging purposes and for non-hedging purposes, subject
to applicable
law.
A Futures Contract is a bilateral agreement providing for the
purchase and sale
of a specified type and amount of a financial instrument, or for
the making and
acceptance of a cash settlement, at a stated time in the
future for a fixed
price. By its terms, a Futures Contract provides for a specified
settlement date
on which, in the case of stock index futures contracts, the
difference between
the price at which the contract was entered into and the
contract's closing
value is settled between the purchaser and seller in cash.
Futures Contracts
differ from options in that they are bilateral agreements,
with both the
purchaser and the seller equally obligated to complete the
transaction. Futures
Contracts call for settlement only on the expiration date
and cannot be
"exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the
purchase or sale of
a security or the purchase of an option in that no purchase
price is paid or
received. Instead, an amount of cash or cash equivalents, which
varies but may
be as low as 5% or less of the value of the contract, must be
deposited with the
broker as "initial margin." Subsequent payments to and from the
broker, referred
to as "variation margin," are made on a daily basis as the value
of the index or
instrument underlying the Futures Contract fluctuates, making
positions in the
Futures Contract more or less valuable - a process known as
"marking to the
market."
Purchases or sales of stock index futures contracts are used
to attempt to
protect the Fund's current or intended stock investments from
broad fluctuations
in stock prices. For example, the Fund may sell stock index
futures contracts in
anticipation of or during a market decline to attempt to offset
the decrease in
market value of the Fund's securities portfolio that might
otherwise result. If
such decline occurs, the loss in value of portfolio securities may
be offset, in
whole or part, by gains on the futures position. When the Fund
is not fully
invested in the securities market and anticipates a significant
market advance,
it may purchase stock index futures contracts in order to
gain 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.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus,
the Fund may
purchase and write options to buy or sell Futures Contracts
in which it may
invest ("Options on Futures Contracts"). Such investment
strategies will be used
for hedging purposes and for non-hedging purposes, subject to
applicable law.
An Option on a Futures Contract provides the holder with the right
to enter into
a "long" position in the underlying Futures Contract, in the
case of a call
option, or a "short" position in the underlying Futures Contract,
in the case of
a put option, at a fixed exercise price up to a stated
expiration date or, in
the case of certain options, on such date. Upon exercise of the
option by the
holder, the contract market clearinghouse establishes a
corresponding short
position for the writer of the option, in the case of a call
option, or a
corresponding long position in the case of a put option. In the
event that an
option is exercised, the parties will be subject to all the
risks associated
with the trading of Futures Contracts, such as payment of initial
and variation
margin deposits. In addition, the writer of an Option on a
Futures Contract,
unlike the holder, is subject to initial and variation margin
requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by
the purchaser
or seller prior to expiration by effecting a closing
purchase or sale
transaction, subject to the availability of a liquid secondary
market, which is
the purchase or sale of an option of the same series (i.e., the
same exercise
price and expiration date) as the option previously purchased
or sold. The
difference between the premiums paid and received represents the
trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by
the Fund on U.S.
exchanges are traded on the same contract market as the
underlying Futures
Contract, and, like Futures Contracts, are subject to regulation
by the CFTC and
the performance guarantee of the exchange clearinghouse. In
addition, Options on
Futures Contracts may be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures
Contracts (a) through
purchases of the underlying Futures Contract, (b) through
ownership of the
instrument, or instruments included in the index, underlying
the Futures
Contract, or (c) through the holding of a call on the same
Futures Contract and
in the same principal amount as the call written where the
exercise price of the
call held (i) is equal to or less than the exercise price of the
call written or
(ii) is greater than the exercise price of the call written if the
difference is
maintained by the Fund in cash or securities in a segregated
account with its
custodian. The Fund may cover the writing of put Options on
Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through
segregation of
cash, short-term money market instruments or high quality debt
securities in an
amount equal to the value of the security or index underlying
the Futures
Contract, or (c) through the holding of a put on the same Futures
Contract and
in the same principal amount as the put written where the
exercise price of the
put held is equal to or greater than the exercise price of the
put written or
where the exercise price of the put held is less than the
exercise price of the
put written if the difference is maintained by the Fund in
cash, short-term
money market instruments or high quality debt securities in a
segregated account
with its custodian. Put and call Options on Futures
Contracts may also be
covered in such other manner as may be in accordance with
the rules of the
exchange on which the option is traded and applicable laws and
regulations. Upon
the exercise of a call Option on a Futures Contract written by
the Fund, the
Fund will be required to sell the underlying Futures Contract
which, if the Fund
has covered its obligation through the purchase of such Contract,
will serve to
liquidate its futures position. Similarly, where a put
Option on a Futures
Contract written by the Fund is exercised, the Fund will be
required to purchase
the underlying Futures Contract which, if the Fund has covered
its obligation
through the sale of such Contract, will close out its futures
position.
The writing of a call Option on a Futures Contract for
hedging purposes
constitutes a partial hedge against declining prices of the
securities or other
instruments required to be delivered under the terms of the
Futures Contract. If
the futures price at expiration of the option is below the
exercise price, the
Fund will retain the full amount of the option premium, less
related transaction
costs, which provides a partial hedge against any decline that may
have occurred
in the Fund's portfolio holdings. The writing of a put
Option on a Futures
Contract constitutes a partial hedge against increasing prices of
the securities
or other instruments required to be delivered under the terms
of the Futures
Contract. If the futures price at expiration of the option is
higher than the
exercise price, the Fund will retain the full amount of the option
premium which
provides a partial hedge against any increase in the price of
securities which
the Fund intends to purchase. If a put or call option the Fund
has written is
exercised, the Fund will incur a loss which will be reduced by the
amount of the
premium it receives. Depending on the degree of correlation
between changes in
the value of its portfolio securities and the changes in the
value of its
futures positions, the Fund's losses from existing Options on
Futures Contracts
may to some extent be reduced or increased by changes in the
value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging
purposes instead
of purchasing or selling the underlying Futures Contracts. For
example, where a
decrease in the value of portfolio securities is anticipated as
a result of a
projected market-wide decline or changes in interest or exchange
rates, the Fund
could, in lieu of selling Futures Contracts, purchase put
options thereon. In
the event that such decrease occurs, it may be offset, in whole
or part, by a
profit on the option. Conversely, where it is projected that
the value of
securities to be acquired by the Fund will increase prior to
acquisition, due to
a market advance or changes in interest or exchange rates,
the Fund could
purchase call Options on Futures Contracts, rather than
purchasing the
underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward
foreign currency
exchange contracts ("Forward Contracts") for hedging and non-
hedging purposes.
Forward Contracts may be used for hedging to attempt to minimize
the risk to the
Fund from adverse changes in the relationship between the
U.S. dollar and
foreign currencies. The Fund intends to enter into Forward
Contracts for hedging
purposes. In particular, 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. The Fund also may
enter into a
Forward Contract in order to assure itself of a predetermined
exchange rate in
connection with a security denominated in a foreign currency. In
addition, the
Fund may enter into Forward Contracts for "cross hedging"
purposes; e.g., the
purchase or sale of a Forward Contract on one type of
currency as a hedge
against adverse fluctuations in the value of a second type of
currency.
If a hedging transaction in Forward Contracts is successful, the
decline in the
value of portfolio securities or other assets or the increase
in the cost of
securities or other assets to be acquired may be offset, at
least in part, by
profits on the Forward Contract. Nevertheless, by entering
into such Forward
Contracts, the Fund may be required to forgo all or a portion of
the benefits
which otherwise could have been obtained from favorable
movements in exchange
rates. The Fund will usually seek to close out positions in such
contracts by
entering into offsetting transactions, which will serve to fix the
Fund's profit
or loss based upon the value of the contracts at the time
the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts
for other than
hedging purposes, which present greater profit potential
but also involve
increased risk. For example, the Fund may purchase a given
foreign currency
through a Forward Contract if, in the judgment of the Adviser, the
value of such
currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund
may sell the currency through a Forward Contract if the Adviser
believes that
its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign
currency exchange
rates occurs, which will increase its gross income. Where
exchange rates do not
move in the direction or to the extent anticipated, however,
the Fund may
sustain losses which will reduce its gross income. Such
transactions, therefore,
could be considered speculative and could involve significant risk
of loss.
The Fund has established procedures consistent with statements
by the SEC and
its staff regarding the use of Forward Contracts by
registered investment
companies, which require the use of segregated assets or "cover"
in connection
with the purchase and sale of such contracts. In those
instances in which the
Fund satisfies this requirement through segregation of assets, it
will maintain,
in a segregated account, cash, cash equivalents or high quality
debt securities,
which will be marked to market on a daily basis, in an amount
equal to the value
of its commitments under Forward Contracts. While these
contracts are not
presently regulated by the CFTC, the CFTC may in the future
assert authority to
regulate Forward Contracts. In such event, the Fund's ability to
utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES
As noted in the Prospectus, the Fund may purchase and write
options on foreign
currencies for hedging purposes in a manner similar to that in
which Forward
Contracts will be utilized. For example, a decline in the
dollar value of a
foreign currency in which portfolio securities are denominated
will reduce the
dollar value of such securities, even if their value in the
foreign currency
remains constant. In order to protect against such diminutions
in the value of
portfolio securities, the Fund may purchase put options on the
foreign currency.
If the value of the currency does decline, the Fund will have the
right to sell
such currency for a fixed amount in dollars and will thereby
offset, in whole or
in part, the adverse effect on its portfolio which
otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in
which securities
to be acquired are denominated is projected, thereby increasing
the cost of such
securities, the Fund may purchase call options thereon. The
purchase of such
options could offset, at least partially, the effects of the
adverse movements
in exchange rates. As in the case of other types of options,
however, the
benefit to the Fund deriving from purchases of foreign currency
options will be
reduced by the amount of the premium and related transaction
costs. In addition,
where currency exchange rates do not move in the direction or
to the extent
anticipated, the Fund could sustain losses on transactions in
foreign currency
options which would require it to forgo a portion or all of the
benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same
types of hedging
purposes. For example, where the Fund anticipates a decline in
the dollar value
of foreign-denominated securities due to adverse fluctuations in
exchange rates
it could, instead of purchasing a put option, write a call
option on the
relevant currency. If the expected decline occurs, the option
will most likely
not be exercised, and the diminution in value of portfolio
securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against
an anticipated
increase in the dollar cost of securities to be acquired, the Fund
could write a
put option on the relevant currency which, if rates move
in the manner
projected, will expire unexercised and allow the Fund to hedge
such increased
cost up to the amount of the premium. Foreign currency options
written by the
Fund will generally be covered in a manner similar to the
covering of other
types of options. As in the case of other types of options,
however, the writing
of a foreign currency option will constitute only a partial
hedge up to the
amount of the premium, and only if rates move in the expected
direction. If this
does not occur, the option may be exercised and the Fund would
be required to
purchase or sell the underlying currency at a loss which may
not be offset by
the amount of the premium. Through the writing of options on
foreign currencies,
the Fund also may be required to forgo all or a portion of the
benefits which
might otherwise have been obtained from favorable movements in
exchange rates.
RISK FACTORS IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE
FUND'S PORTFOLIO.
The Fund's abilities effectively to hedge all or a portion of
its portfolio
through transactions in options, Futures Contracts,
Options on Futures
Contracts, Forward Contracts and options on foreign currencies
depend on the
degree to which price movements in the underlying index or
instrument correlate
with price movements in the relevant portion of the Fund's
portfolio. In the
case of futures and options based on an index, the portfolio will
not duplicate
the components of the index, and in the case of futures and
options on fixed
income securities, the portfolio securities which are being
hedged may not be
the same type of obligation underlying such contract. The
use of Forward
Contracts for "cross hedging" purposes may involve greater
correlation risks. As
a result, the correlation probably will not be exact.
Consequently, the Fund
bears the risk that the price of the portfolio securities being
hedged will not
move in the same amount or direction as the underlying index or
obligation.
For example, if the Fund purchases a put option on an index
and the index
decreases less than the value of the hedged securities,
the Fund would
experience a loss which is not completely offset by the put
option. It is also
possible that there may be a negative correlation between
the index or
obligation underlying an option or Futures Contract in which
the Fund has a
position and the portfolio securities the Fund is attempting to
hedge, which
could result in a loss on both the portfolio and the hedging
instrument. In
addition, the Fund may enter into transactions in Forward
Contracts or options
on foreign currencies in order to hedge against exposure
arising from the
currencies underlying such forwards. In such instances, the Fund
will be subject
to the additional risk of imperfect correlation between changes
in the value of
the currencies underlying such forwards or options and changes
in the value of
the currencies being hedged.
It should be noted that stock index futures contracts or options
based upon a
narrower index of securities, such as those of a particular
industry group, may
present greater risk than options or futures based on a broad
market index. This
is due to the fact that a narrower index is more susceptible
to rapid and
extreme fluctuations as a result of changes in the value of a
small number of
securities. Nevertheless, where the Fund enters into transactions
in options or
futures on narrow-based indices for hedging purposes, movements
in the value of
the index should, if the hedge is successful, correlate closely
with the portion
of the Fund's portfolio or the intended acquisitions being hedged.
The trading of Futures Contracts, options and Forward
Contracts for hedging
purposes entails the additional risk of imperfect correlation
between movements
in the futures or option price and the price of the
underlying index or
obligation. The anticipated spread between the prices may be
distorted due to
the differences in the nature of the markets, such as
differences in margin
requirements, the liquidity of such markets and the participation
of speculators
in the options, futures and forward markets. In this
regard, trading by
speculators in options, futures and Forward Contracts has
in the past
occasionally resulted in market distortions, which may be
difficult or
impossible to predict, particularly near the expiration of such
contracts.
The trading of Options on Futures Contracts also entails the
risk that changes
in the value of the underlying Futures Contract will not be
fully reflected in
the value of the option. The risk of imperfect correlation,
however, generally
tends to diminish as the maturity date of the Futures Contract
or expiration
date of the option approaches.
Further, with respect to options on securities, options on
stock 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 forgo the benefits which might otherwise have been
obtained from an
increase in the value of portfolio securities or other assets
or a decline in
the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse
market events,
the Fund's overall return may be lower than if it had not engaged
in the hedging
transactions.
It should also be noted that the Fund may enter into
transactions in options
(except for options on foreign currencies), Futures
Contracts, Options on
Futures Contracts and Forward Contracts not only for hedging
purposes, but also
for non-hedging purposes intended to increase portfolio returns.
Non- hedging
transactions in such investments involve greater risks and may
result in losses
which may not be offset by increases in the value of portfolio
securities or
declines in the cost of securities to be acquired. The Fund
will only write
covered options, such that cash or securities necessary to
satisfy an option
exercise will be segregated at all times, unless the option is
covered in such
other manner as may be in accordance with the rules of the
exchange on which the
option is traded and applicable laws and regulations.
Nevertheless, the method
of covering an option employed by the Fund may not fully protect
it against risk
of loss and, in any event, the Fund could suffer losses on the
option position
which might not be offset by corresponding portfolio gains.
The Fund also may enter into transactions in Futures
Contracts, Options on
Futures Contracts and Forward Contracts for other than hedging
purposes, which
could expose the Fund to significant risk of loss if foreign
currency exchange
rates do not move in the direction or to the extent anticipated.
In this regard,
the foreign currency may be extremely volatile from time to
time, as discussed
in the Prospectus and in this Statement of Additional
Information, and the use
of such transactions for non-hedging purposes could
therefore involve
significant risk of loss.
With respect to the writing of straddles on securities, the Fund
incurs the risk
that the price of the underlying security will not remain
stable, that one of
the options written will be exercised and that the resulting
loss will not be
offset by the amount of the premiums received. Such
transactions, therefore,
create an opportunity for increased return by providing the
Fund with two
simultaneous premiums on the same security, but involve
additional risk, since
the Fund may have an option exercised against it regardless of
whether the price
of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior
to exercise or
expiration, a futures or option position can only be terminated by
entering into
a closing purchase or sale transaction. This requires a
secondary market for
such instruments on the exchange on which the initial
transaction was entered
into. While the Fund will enter into options or futures positions
only if there
appears to be a liquid secondary market therefor, there can be no
assurance that
such a market will exist for any particular contracts at any
specific time. In
that event, it may not be possible to close out a position held by
the Fund, and
the Fund could be required to purchase or sell the instrument
underlying an
option, make or receive a cash settlement or meet ongoing
variation margin
requirements. Under such circumstances, if the Fund has
insufficient cash
available to meet margin requirements, it will be necessary
to liquidate
portfolio securities or other assets at a time when it is
disadvantageous to do
so. The inability to close out options and futures positions,
therefore, could
have an adverse impact on the Fund's ability effectively to hedge
its portfolio,
and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or
option thereon may
be adversely affected by "daily price fluctuation limits,"
established by
exchanges, which limit the amount of fluctuation in the price
of a contract
during a single trading day. Once the daily limit has been
reached in the
contract, no trades may be entered into at a price beyond the
limit, thus
preventing the liquidation of open futures or option positions
and requiring
traders to make additional margin deposits. Prices have in the
past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject
to the risk of
trading halts, suspensions, exchange or clearinghouse
equipment failures,
government intervention, insolvency of a brokerage firm or
clearinghouse or
other disruptions of normal trading activity, which could at
times make it
difficult or impossible to liquidate existing positions or to
recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon
the opening of a
futures or forward position and the writing of an option, such
transactions
involve substantial leverage. As a result, relatively small
movements in the
price of the contract can result in substantial unrealized
gains or losses.
Where the Fund enters into such transactions for hedging
purposes, any losses
incurred in connection therewith should, if the hedging strategy
is successful,
be offset, in whole or in part, by increases in the value of
securities or other
assets held by the Fund or decreases in the prices of securities
or other assets
the Fund intends to acquire. Where the Fund enters into such
transactions for
other than hedging purposes, the margin requirements
associated with such
transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures
and options are
traded may impose limitations governing the maximum number of
positions on the
same side of the market and involving the same underlying
instrument which may
be held by a single investor, whether acting alone or in
concert with others
(regardless of whether such contracts are held on the same
or different
exchanges or held or written in one or more accounts or
through one or more
brokers). Further, the CFTC and the various contract markets
have established
limits referred to as "speculative position limits" on the
maximum net long or
net short position which any person may hold or control in a
particular futures
or option contract. An exchange may order the liquidation of
positions found to
be in violation of these limits and it may impose other
sanctions or
restrictions. The Adviser does not believe that these trading
and position
limits will have any adverse impact on the strategies for hedging
the portfolio
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the
Fund assumes
when it purchases an Option on a Futures Contract is the
premium paid for the
option, plus related transaction costs. In order to profit
from an option
purchased, however, it may be necessary to exercise the option
and to liquidate
the underlying Futures Contract, subject to the risks of the
availability of a
liquid offset market described herein. The writer of an
Option on a Futures
Contract is subject to the risks of commodity futures trading,
including the
requirement of initial and variation margin payments, as well as
the additional
risk that movements in the price of the option may not correlate
with movements
in the price of the underlying security, index, currency or
Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND
TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward
Contracts on foreign
currencies, as well as futures and options on foreign
currencies and
transactions executed on foreign exchanges, are subject to
all of the
correlation, liquidity and other risks outlined above. In
addition, however,
such transactions are subject to the risk of governmental
actions affecting
trading in or the prices of currencies underlying such
contracts, which could
restrict or eliminate trading and could have a substantial adverse
effect on the
value of positions held by the Fund. Further, the value of such
positions could
be adversely affected by a number of other complex political
and economic
factors applicable to the countries issuing the underlying
currencies.
Further, unlike trading in most other types of instruments,
there is no
systematic reporting of last sale information with respect
to the foreign
currencies underlying contracts thereon. As a result, the
available information
on which trading systems will be based may not be as complete as
the comparable
data on which the Fund makes investment and trading decisions in
connection with
other transactions. Moreover, because the foreign currency
market is a global,
24-hour market, events could occur in that market which will not
be reflected in
the forward, futures or options markets until the following day,
thereby making
it more difficult for the Fund to respond to such events in a
timely manner.
Settlements of exercises of over-the-counter Forward
Contracts or foreign
currency options generally must occur within the country issuing
the underlying
currency, which in turn requires traders to accept or make
delivery of such
currencies in conformity with any U.S. or foreign restrictions
and regulations
regarding the maintenance of foreign banking relationships, fees,
taxes or other
charges.
Unlike transactions entered into by the Fund in Futures
Contracts and
exchange-traded options, options on foreign currencies, Forward
Contracts and
over-the-counter options on securities are not traded on
contract markets
regulated by the CFTC or (with the exception of certain
foreign currency
options) the SEC. To the contrary, such instruments are traded
through financial
institutions acting as market-makers, although foreign currency
options are also
traded on certain national securities exchanges, such as the
Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC
regulation. In
an over-the-counter trading environment, many of the
protections afforded to
exchange participants will not be available. For example,
there are no daily
price fluctuation limits, and adverse market movements could
therefore continue
to an unlimited extent over a period of time. Although the
purchaser of an
option cannot lose more than the amount of the premium plus
related transaction
costs, this entire amount could be lost. Moreover, the option
writer and a
trader of Forward Contracts could lose amounts substantially in
excess of their
initial investments, due to the margin and collateral
requirements associated
with such positions.
In addition, over-the-counter transactions can only be
entered into with a
financial institution willing to take the opposite side, as
principal, of the
Fund's position unless the institution acts as broker and
is able to find
another counterparty willing to enter into the transaction with
the Fund. Where
no such counterparty is available, it will not be possible
to enter into a
desired transaction. There also may be no liquid secondary market
in the trading
of over-the-counter contracts, and the Fund could be required to
retain options
purchased or written, or Forward Contracts entered into,
until exercise,
expiration or maturity. This in turn could limit the Fund's
ability to profit
from open positions or to reduce losses experienced, and could
result in greater
losses.
Further, over-the-counter transactions are not subject to the
guarantee of an
exchange clearinghouse, and the Fund will therefore be subject
to the risk of
default by, or the bankruptcy of, the financial institution
serving as its
counterparty. One or more of such institutions also may decide
to discontinue
their role as market-makers in a particular currency or
security, thereby
restricting the Fund's ability to enter into desired hedging
transactions. The
Fund will enter into an over-the-counter transaction only with
parties whose
creditworthiness has been reviewed and found satisfactory by the
Adviser.
Options on securities, options on stock indexes, Futures
Contracts, Options on
Futures Contracts and options on foreign currencies may be
traded on exchanges
located in foreign countries. Such transactions may not be
conducted in the same
manner as those entered into on U.S. exchanges, and may be
subject to different
margin, exercise, settlement or expiration procedures. As a
result, many of the
risks of over-the-counter trading may be present in
connection with such
transactions.
Options on foreign currencies traded on national securities
exchanges are within
the jurisdiction of the SEC, as are other securities traded on
such exchanges.
As a result, many of the protections provided to traders on
organized exchanges
will be available with respect to such transactions. In
particular, all foreign
currency option positions entered into on a national securities
exchange are
cleared and guaranteed by the Options Clearing Corporation (the
"OCC"), thereby
reducing the risk of counterparty default. Further, a liquid
secondary market in
options traded on a national securities exchange may be more
readily available
than in the over-the-counter market, potentially permitting
the Fund to
liquidate open positions at a profit prior to exercise or
expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency
options, however, is
subject to the risks of the availability of a liquid secondary
market described
above, as well as the risks regarding adverse market movements,
margining of
options written, the nature of the foreign currency
market, possible
intervention by governmental authorities and the effects of other
political and
economic events. In addition, exchange-traded options on
foreign currencies
involve certain risks not presented by the over-the-counter
market. For example,
exercise and settlement of such options must be made
exclusively through the
OCC, which has established banking relationships in applicable
foreign countries
for this purpose. As a result, the OCC may, if it determines
that foreign
governmental restrictions or taxes would prevent the orderly
settlement of
foreign currency option exercises, or would result in undue
burdens on the OCC
or its clearing member, impose special procedures on exercise
and settlement,
such as technical changes in the mechanics of delivery of
currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES
CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool"
for purposes of
the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter
into transactions in Futures Contracts and Options on Futures
Contracts only (i)
for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin
and premiums on
such non-hedging positions does not exceed 5% of the liquidation
value of the
Fund's assets. In addition, the Fund must comply with the
requirements of
various state securities laws in connection with such
transactions.
The Fund has adopted the additional restriction that it will
not enter into a
Futures Contract if, immediately thereafter, the value of
securities and other
obligations underlying all such Futures Contracts would exceed
50% of the value
of the Fund's total assets. Moreover, the Fund will not
purchase put and call
options if as a result more than 5% of its total assets would
be invested in
such options or in the premiums paid for such options.
When the Fund purchases a Futures Contract, an amount of cash or
securities will
be deposited in a segregated account with the Fund's
custodian so that the
amount so segregated will at all times equal the value of the
Futures Contract,
thereby insuring that the use of such futures is unleveraged.
The staff of the SEC has taken the position that purchased
over-the-counter
options and assets used to cover written over-the-counter
options are illiquid
and, therefore, together with other illiquid securities held by
a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling").
Although the
Adviser disagrees with this position, the Adviser intends to
limit the Fund's
writing of over-the-counter options in accordance with the
following procedure.
Except as provided below, the Fund intends to write over-the-
counter options
only with primary U.S. Government securities dealers recognized
as such by the
Federal Reserve Bank of New York. Also, the contracts the Fund has
in place with
such primary dealers provide that the Fund has the absolute right
to repurchase
an option it writes at any time at a price which represents
the fair market
value, as determined in good faith through negotiation between the
parties, but
which in no event will exceed a price determined pursuant to a
formula in the
contract. Although the specific formula may vary between
contracts with
different primary dealers, the formula generally is based on a
multiple of the
premium received by the Fund for writing the option, plus the
amount, if any of
the option's intrinsic value (i.e., the amount that the option is
in-the-money).
The formula may also include a factor to account for the
difference between the
price of the security and the strike price of the option if
the option is
written out-of-the-money. The Fund will treat all or a portion
of the formula
as illiquid for purposes of the SEC illiquidity ceiling test
imposed by the SEC
staff. The Fund may also write over-the-counter options
with non-primary
dealers, including foreign dealers (where applicable), and will
treat the assets
used to cover these options as illiquid for purposes of such
SEC illiquidity
ceiling test.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be
changed without
the approval of the holders of a majority of the Fund's shares
(which, as used
in this Statement of Additional Information, means the lesser of
(i) more than
50% of the outstanding shares of the Trust or a series or class,
as applicable,
or (ii) 67% or more of the outstanding shares of the Trust or a
series or class,
as applicable, present at a meeting if holders of more
than 50% of the
outstanding shares of the Trust or a series or class, as
applicable, are
represented in person or by proxy). Except for Investment
Restriction (1), these
investment restrictions and policies are adhered to at the time
of purchase or
utilization of assets; a subsequent change in circumstances
will not be
considered to result in a violation of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its
total assets, and
then only as a temporary measure for extraordinary or emergency
purposes, or
pledge, mortgage or hypothecate an amount of its assets
(taken at market
value) in excess of 15% of its total assets, in each case
taken at the lower
of cost or market value. For the purpose of this
restriction, collateral
arrangements with respect to options, Futures Contracts,
Options on Futures
Contracts, Forward Contracts and options on foreign currencies,
and payments
of initial and variation margin in connection therewith, are
not considered a
pledge of assets.
(2) Underwrite securities issued by other persons except
insofar as the
Fund may technically be deemed an underwriter under the
Securities Act of 1933
in selling a portfolio security.
(3) Concentrate its investments in any particular industry,
but if it is
deemed appropriate for the attainment of its investment
objective, the Fund
may invest up to 25% of its assets (taken at market value at
the time of each
investment) in securities of issuers in any one industry.
(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 (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.
(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 U.S.
Government securities.
(7) Purchase voting securities of any issuer if 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; or purchase securities of
any issuer if
such purchase at the time thereof would cause more than 10%
of any class of
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.
(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 and the
Fund may make
margin deposits in connection with options, Futures
Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign
currencies.
(11) 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.
(12) Purchase securities issued by any other registered
investment company
or investment trust except by purchase in the open market where
no commission
or profit to a sponsor or dealer results from such purchase
other than the
customary broker's commission, or except when such purchase,
though not made
in the open market, is part of a plan of merger or
consolidation; provided,
however, that the Fund will not purchase such securities if
such purchase at
the time thereof would cause more than 10% of its total
assets (taken at
market value) to be invested in the securities of such issuers;
and, provided
further, that the Fund will not purchase securities issued
by an open-end
investment company.
(13) Write, purchase or sell any put or call option 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.
(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. For the purposes of this
restriction,
collateral arrangements with respect to options, Futures
Contracts and Options
on Futures Contracts and collateral arrangements with respect
to initial and
variation margins are not deemed to be the issuance of a senior
security.
As a non-fundamental policy, the Fund will not knowingly invest
in securities
which are subject to legal or contractual restrictions on
resale (other than
repurchase agreements), unless the Board of Trustees has
determined that such
securities are liquid based upon trading markets for the specific
security, if,
as a result thereof, more than 15% of the Fund's net assets
(taken at market
value) would be so invested.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in
companies which,
including their respective predecessors, have a record of less
than three years"
continuous operation.
In order to comply with certain state statutes, the Fund will
not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio
securities if
the percentage of securities so pledged, mortgaged or
hypothecated would exceed
33 1/3%.
These operating policies are not fundamental and may be
changed without
shareholder approval.
4. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision
over the affairs
of the Fund. The Adviser is responsible for the investment
management of the
Fund's assets and the officers of the Trust are responsible for
its operations.
The Trustees and officers of the Trust are listed below,
together with their
principal occupations during the past five years. (Their titles
may have varied
during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former
Chairman
(until September 30, 1991)
MARSHALL N. COHAN
Private Investor.
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard
Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T.
Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment
advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (corporate financial consultants),
President and
Treasurer
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice
President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists),
President (since
January, 1990)
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June
1994); Sundstrand
Corporation (diversified mechanical manufacturer),
Director; Society
Corporation (bank holding company), Director (prior to April
1992) Society
National Bank (commercial bank); Director (prior to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
LESLIE J. NANBERG,* Vice President
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President,
General
Counsel and Assistant Secretary (since December 1989); The
Boston Company
Advisors, Inc., President and General Counsel (prior to December
1989)
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and
Associate General
Counsel (since September 1990); associated with a major law
firm (prior to
August 1990)
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since
June, 1989)
- ---------
*"Interested persons" (as defined in the 1940 Act) of the Adviser,
whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain
affiliates of
MFS or with certain other funds of which MFS or a subsidiary is
the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs.
Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar
positions with certain other MFS affiliates. Mr. Bailey is a
Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees (who
currently receive
a fee of $1,250 per year plus $225 per meeting and committee
meeting attended
together with such Trustee's out-of-pocket expenses) and the Trust
has adopted a
retirement plan for non-interested Trustees. Under this plan,
a Trustee will
retire upon reaching age 75 and if the Trustee has completed at
least five years
of service, he would be entitled to annual payments during his
lifetime of up to
50% of such Trustee's average annual compensation (based on
the three years
prior to his retirement) depending on his length of service. A
Trustee may also
retire prior to age 75 and receive reduced payments if he has
completed at least
five years of service. Under the plan, a Trustee (or his
beneficiaries) will
also receive benefits for a period of time in the event the
Trustee is disabled
or dies. These benefits will also be based on the Trustee's
average annual
compensation and length of service. There is no retirement plan
provided by the
Trust for the interested Trustees. The Fund will accrue its
allocable share of
compensation expenses each year to cover current years service and
amortize past
service cost.
As of February 28, 1995, the Trustees and officers, as a group,
owned less than
1% of the outstanding shares of the Fund. As of February 28,
1995, Merrill
Lynch, Pierce, Fenner & Smith, P.O. Box 45286, Jacksonville, FL
32232- 5286 was
the record owner of approximately 13.52% of the outstanding
Class B shares of
the Fund.
Set forth in Appendix A hereto is certain information
concerning the cash
compensation paid to non-interested Trustees and benefits accrued,
and estimated
benefits payable under the retirement plan. The Declaration of
Trust provides
that the Trust will indemnify its Trustees and officers against
liabilities and
expenses incurred in connection with litigation in which they
may be involved
because of their offices with the Trust, unless, as to
liabilities to the Trust
or its shareholders, it is finally adjudicated that they
engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties
involved in their offices, or with respect to any matter,
unless it is
adjudicated that they did not act in good faith in the
reasonable belief that
their actions were in the best interest of the Trust. In the case
of settlement,
such indemnification will not be provided unless it has been
determined pursuant
to the Declaration of Trust, that such officers or Trustees have
not engaged in
willful misfeasance, bad faith, gross negligence or reckless
disregard of their
duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money
management dating
from 1924. MFS is a wholly owned subsidiary of Sun Life of
Canada (U.S.) which
in turn is a wholly owned subsidiary of Sun Life Assurance Company
of Canada.
The Adviser manages the assets of the Fund pursuant to an
Investment Advisory
Agreement with the Fund dated as of August 1, 1993 (the "Advisory
Agreement").
The Adviser provides the Fund with overall investment
advisory and
administrative services, as well as general office facilities.
Subject to such
policies as the Trustees may determine, the Adviser makes
investment decisions
for the Fund. For these services and facilities, the Adviser
receives an annual
management fee, computed and paid monthly, in an amount equal
to the sum of
0.75% of the Fund's average daily net assets.
For the Fund's fiscal years ended November 30, 1992, the
Fund's former
investment adviser, Lifetime Advisers, Inc., a Delaware
corporation and a wholly
owned subsidiary of MFS ("LAI"), received $1,912,372, under
its advisory
agreement with the Fund. LAI had no employees and relied on MFS
to furnish it
with overall administrative services and general office
facilities. For the
Fund's fiscal year ended November 30, 1993, the Fund's
current investment
adviser, MFS, together with LAI, received in aggregate
$4,113,061 under their
investment advisory agreements with the Fund. For the Fund's
fiscal year ended
November 30, 1994, MFS received $8,805,097 under its
investment advisory
agreement.
In order to comply with the expense limitations of certain
state securities
commissions, the Adviser will reduce its management fee or
otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes
and brokerage
commissions, incurred by the Fund in any fiscal year to the extent
such expenses
exceed the most restrictive of such state expense limitations.
The Adviser will
make appropriate adjustments to such reductions and
reimbursements in response
to any amendment or rescission of the various state requirements.
The Fund pays all of its expenses (other than those assumed by
the Adviser or
MFD) including: Trustees fees discussed above, governmental
fees; interest
charges; taxes; membership dues in the Investment Company
Institute allocable to
the Fund; fees and expenses of independent auditors, of legal
counsel, and of
any transfer agent, registrar or dividend disbursing agent of the
Fund; expenses
of repurchasing and redeeming shares and servicing
shareholder accounts;
expenses of preparing, printing and mailing share
certificates, periodic
reports, notices and proxy statements to shareholders and to
governmental
officers and commissions; brokerage and other expenses
connected with the
execution, recording and settlement of portfolio security
transactions;
insurance premiums; fees and expenses of State Street Bank and
Trust Company,
the Fund's Custodian, for all services to the Fund, including
safekeeping of
funds and securities and maintaining required books and
accounts; expenses of
calculating the net asset value of shares of the Fund; and
expenses of
shareholder meetings. Expenses relating to the issuance,
registration and
qualification of shares of the Fund and the preparation, printing
and mailing of
prospectuses are borne by the Fund except that the Fund's
Distribution Agreement
with MFD requires MFD to pay for prospectuses that are to be
used for sales
purposes. Expenses of the Trust which are not attributable to a
specific series
are allocated among the series in a manner believed by
management of the Trust
to be fair and equitable. Payment by the Fund of brokerage
commissions for
brokerage and research services of value to the Adviser in
serving its clients
is discussed under the caption "Portfolio Transactions
and Brokerage
Commissions" below.
MFS pays the compensation of the Trust's officers and of any
Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense
all necessary
administrative services, including office space, equipment,
clerical personnel,
investment advisory facilities, and all executive and
supervisory personnel
necessary for managing the Fund's investments, effecting
its portfolio
transactions and, in general, administering its affairs.
The Advisory Agreement with the Fund will remain in effect until
August 1, 1995,
and will continue in effect thereafter only if such continuance
is specifically
approved at least annually by the Board of Trustees or by vote of
a majority of
the Fund's shares (as defined in "Investment Restrictions") and,
in either case,
by a majority of the Trustees who are not parties to the Advisory
Agreement or
interested persons of any such party. The Advisory
Agreement terminates
automatically if it is assigned and may be terminated without
penalty by vote of
a majority of the Fund's shares (as defined in "Investment
Restrictions") or by
either party on not more than 60 days" nor less than 30 days"
written notice.
The Advisory Agreement provides that if MFS ceases to serve as
the Adviser to
the Fund, the Fund will change its name so as to delete the term
"MFS" and that
MFS may render services to others and may permit other fund
clients to use the
term "MFS" in their names. The Advisory Agreement also provides
that neither the
Adviser nor its personnel shall be liable for any error of
judgment or mistake
of law or for any loss arising out of any investment or for any
act or omission
in the execution and management of the Fund, except for willful
misfeasance, bad
faith or gross negligence in the performance of its or their
duties or by reason
of reckless disregard of its or their obligations and duties
under the Advisory
Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the
custodian of the
Fund's assets. The Custodian's responsibilities include
safekeeping and
controlling the Fund's cash and securities, handling the receipt
and delivery of
securities, determining income and collecting interest and
dividends on the
Fund's investments, maintaining books of original entry for
portfolio and fund
accounting and other required books and accounts, and calculating
the daily net
asset value and public offering price of each class of shares of
the Fund. The
Custodian does not determine the investment policies of the Fund
or decide which
securities the Fund will buy or sell. The Fund may,
however, invest in
securities of the Custodian and may deal with the Custodian
as principal in
securities transactions. The Trustees have reviewed and approved
as in the best
interests of the Fund and its shareholders the custodial
arrangements with Chase
Manhattan Bank, N.A., for securities of the Fund held outside the
United States.
The Custodian also serves as the dividend and distribution
disbursing agent of
the Fund. The Custodian has contracted with the Adviser for
the Adviser to
perform certain accounting functions related to options
transactions for which
the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"),
a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent,
pursuant to a
Shareholder Servicing Agent Agreement with the Trust, dated as of
September 10,
1986 (the "Agency Agreement"). The Shareholder
Servicing Agent's
responsibilities under the Agency Agreement include administering
and performing
transfer agent functions and the keeping of records in
connection with the
issuance, transfer and redemption of each class of shares of the
Fund. For these
services, the Shareholder Servicing Agent will receive a fee
based on the net
assets of each class of shares of the Fund, computed and paid
monthly. In
addition, the Shareholder Servicing Agent will be reimbursed
by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on
behalf of the
Fund. State Street Bank and Trust Company, the dividend and
distribution
disbursing agent for the Fund, has contracted with the
Shareholder Servicing
Agent to administer and perform certain dividend and
distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the
distributor for the
continuous offering of shares of the Fund pursuant to a
Distribution Agreement
as amended and restated January 1, 1995 (the "Distribution
Agreement"). Prior to
January 1, 1995, MFS Financial Services, Inc. ("FSI"),
another wholly owned
subsiduary of MFS, was the Fund's distributor. Where this SAI
refers to MFD in
relation to the receipt or payment of money with respect to a
period or periods
prior to January 1, 1995, such reference shall be deemed to
include FSI, as the
predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares
of the Fund to
dealers. The public offering price of the Class A shares of the
Fund is their
net asset value next computed after the sale plus a sales
charge which varies
based upon the quantity purchased. The public offering price of a
Class A share
of the Fund is calculated by dividing the net asset value of a
Class A share by
the difference (expressed as a decimal) between 100% and the
sales charge
percentage of offering price applicable to the purchase (see
"Purchases" in the
Prospectus). The sales charge scale set forth in the
Prospectus applies to
purchases of Class A shares of the Fund alone or in combination
with shares of
all classes of certain other funds in the MFS Family of Funds
(the "MFS Funds")
and certain other funds (as noted under Right of Accumulation)
by any person,
including members of a family unit (e.g., husband, wife and minor
children) and
bona fide trustees, and also applies to purchases made
under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal
Programs" in
this Statement of Additional Information). A group might
qualify to obtain
quantity sales charge discounts (see "Investment and Withdrawal
Programs" in
this Statement of Additional Information).
Class A shares of the Fund may be sold at their net asset
value to certain
persons or in certain transactions as described in the
Prospectus. Such sales
are made without a sales charge to promote good will with
employees and others
with whom MFS, MFD and/or the Fund have business relationships,
and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all
dealers) from the
applicable public offering price of the Class A shares.
Dealer allowances
expressed as a percentage of offering price for all offering
prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The
commission paid
to the underwriter is the difference between the total amount
invested and the
sum of (a) the net proceeds to the Fund and (b) the dealer
commission. Because
of rounding in the computation of offering price, the
portion of the sales
charge paid to the underwriter may vary and the total sales
charge may be more
or less than the sales charge calculated using the sales charge
expressed as a
percentage of the offering price or as a percentage of the net
amount invested
as listed in the Prospectus. In the case of the maximum sales
charge the dealer
retains 5% and MFD retains approximately 3/4 of 1% of the public
offering price.
In addition, MFD pays a commission to dealers who initiate and
are responsible
for purchases of $1 million or more as described in the
Prospectus.
During the fiscal year ended November 30, 1994, MFD received
sales charges of
$231,114 and dealers received sales charges of $1,784,829 (as
their concession
on gross sales charges of $2,015,943) for selling Class A
shares of the Fund;
the Fund received $106,741,934 representing the aggregate net
asset value of
such shares.
CLASS B SHARES: MFD acts as agent in selling Class B shares of
the Fund. The
public offering price of Class B shares is their net asset value
next computed
after the sale (see "Purchases" in the Prospectus).
During the fiscal year ended November 30, 1994, 1993 and 1992,
the CDSC imposed
on redemption of Class B shares was $1,027,718, $879,938
and $456,000,
respectively.
GENERAL: Neither MFD nor dealers are permitted to delay
placing orders to
benefit themselves by a price change. On occasion, MFD may obtain
brokers loans
from various banks, including the custodian banks for the
MFS Funds, to
facilitate the settlement of sales of shares of the Fund to
dealers. MFD may
benefit from its temporary holding of funds paid to it by
investment dealers for
the purchase of Funds shares.
The Distribution Agreement will remain in effect until August 1,
1996 and will
continue in effect thereafter only if such continuance is
specifically approved
at least annually by the Board of Trustees or by vote of a
majority of the
Trust's shares (as defined in "Investment Restrictions") and in
either case, by
a majority of the Trustees who are not parties to such
Distribution Agreement or
interested persons of any such party. The Distribution
Agreement terminates
automatically if it is assigned and may be terminated without
penalty by either
party on not more than 60 days" nor less than 30 days" notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the
Fund are made by
employees of the Adviser, who are appointed and supervised
by its senior
officers. Changes in the Fund's investments are reviewed by
the Board of
Trustees. The Fund's portfolio manager may serve other clients of
the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security
transactions with
broker-dealers for execution is to obtain and maintain the
availability of
execution at the most favorable prices and in the most
effective manner
possible. The Adviser attempts to achieve this result
by selecting
broker-dealers to execute portfolio transactions on behalf of the
Fund and other
clients of the Adviser on the basis of their professional
capability, the value
and quality of their brokerage services, and the level of
their brokerage
commissions. In the case of securities, such as government
securities, which are
principally traded in the over-the-counter market (where no
stated commissions
are paid but the prices include a dealer's markup or markdown),
the Adviser
normally seeks to deal directly with the primary market makers,
unless in its
opinion, better prices are available elsewhere. In the case
of securities
purchased from underwriters, the cost of such securities
generally includes a
fixed underwriting commission or concession. Securities
firms or futures
commission merchants may receive brokerage commissions on
transactions involving
options, Futures Contracts and Options on Futures Contracts and
the purchase and
sale of underlying securities upon exercise of options.
The brokerage
commissions associated with buying and selling options may be
proportionately
higher than those associated with general securities transactions.
From time to
time, soliciting dealer fees are available to the Adviser on the
tender of the
Fund's portfolio securities in so-called tender or exchange
offers. Such
soliciting dealer fees are in effect recaptured for the Fund by
the Adviser. At
present no other recapture arrangements are in effect.
Under the Advisory Agreement and as permitted by Section 28(e) of
the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer
which provides brokerage and research services to the
Adviser an amount of
commission for effecting a securities transaction for the Fund in
excess of the
amount other broker-dealers would have charged for the
transaction if the
Adviser determines in good faith that the greater commission is
reasonable in
relation to the value of the brokerage and research services
provided by the
executing broker-dealer viewed in terms of either a particular
transaction or
the Adviser's overall responsibilities to the Fund or to its
other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as
to the value of
securities, the advisability of purchasing or selling
securities, and the
availability of purchasers or sellers of securities; furnishing
analyses and
reports concerning issues, industries, securities, economic
factors and trends,
portfolio strategy and the performance of accounts; and
effecting securities
transactions and performing functions incidental thereto such as
clearance and
settlement.
Although commissions paid on every transaction will, in the
judgment of the
Adviser, be reasonable in relation to the value of the
brokerage services
provided, commissions exceeding those which another broker might
charge may be
paid to broker-dealers who were selected to execute
transactions on behalf of
the Fund and the Adviser's other clients in part for providing
advice as to the
availability of purchasers or sellers of securities and
services in effecting
securities transactions and performing functions incidental
thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual
information or services ("Research") to the Adviser for no
consideration other
than brokerage or underwriting commissions. Securities may be
bought or sold
through such broker-dealers, but at present, unless otherwise
directed by the
Fund, a commission higher than one charged elsewhere will not be
paid to such a
firm solely because it provided Research to the Adviser. The
Trustees (together
with the Trustees of the other MFS Funds) have directed the
Adviser to allocate
a total of $20,000 of commission business from the MFS Funds to
the Pershing
Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal
of the Lipper Directors' Analytical Data Service (which
provides information
useful to the Trustees in reviewing the relationship between
the Fund and the
Adviser).
The Adviser's investment management personnel attempt to evaluate
the quality of
Research provided by brokers. Results of this effort are
sometimes used by the
Adviser as a consideration in the selection of brokers to
execute portfolio
transactions. However, the Adviser is unable to quantify
the amount of
commissions which will be paid as a result of such
Research because a
substantial number of transactions will be effected through
brokers which
provide Research but which were selected principally because of
their execution
capabilities.
The management fee that the Fund pays to the Adviser will not
be reduced as a
consequence of the Adviser's receipt of brokerage and research
services. To the
extent the Fund's portfolio transactions are used to obtain such
services, the
brokerage commissions paid by the Fund will exceed those that
might otherwise be
paid, by an amount which cannot be presently determined. Such
services would be
useful and of value to the Adviser in serving both the Fund and
other clients
and, conversely, such services obtained by the placement of
brokerage business
of other clients would be useful to the Adviser in carrying out
its obligations
to the Fund. While such services are not expected to reduce the
expenses of the
Adviser, the Adviser would, through use of the services, avoid
the additional
expenses which would be incurred if it should attempt to
develop comparable
information through its own staff.
For the Fund's fiscal year ended November 30, 1994, total
brokerage commissions
of $923,164 were paid on total transactions (other than
U.S. Government
securities, purchased options transactions and short-term
obligations) of
$1,053,768,486. For the Fund's fiscal year ended November 30,
1993, total
brokerage commissions of $779,203 were paid on total
transactions (other than
U.S. Government securities, purchased options transactions
and short-term
obligations) of $1,062,439,901. For the Fund's fiscal year
ended November 30,
1992, total brokerage commissions of $225,161 were paid on
transactions (other
than U.S. Government securities, purchased options transactions
and short-term
obligations) of $441,990,845. During the Fund's fiscal year
ended November 30,
1994, the Fund acquired and sold securities of an affiliate
of a regular
broker-dealer of the Fund.
In certain instances there may be securities which are suitable
for the Fund's
portfolio as well as for that of one or more of the other clients
of the Adviser
or MFS or any subsidiary of MFS. Investment decisions for the
Fund and for such
other clients are made with a view to achieving their
respective investment
objectives. It may develop that a particular security is bought or
sold for only
one client even though it might be held by, or bought or
sold for, other
clients. Likewise, a particular security may be bought for one
or more clients
when one or more other clients are selling that same security.
Some simultaneous
transactions are inevitable when several clients receive
investment advice from
the same investment adviser, particularly when the same security
is suitable for
the investment objectives of more than one client. When two or
more clients are
simultaneously engaged in the purchase or sale of the same
security, the
securities are allocated among clients in a manner believed to
be equitable to
each. It is recognized that in some cases this system could have
a detrimental
effect on the price or volume of the security as far as the Fund
is concerned.
In other cases, however, it is believed that the Fund's ability
to participate
in volume transactions will produce better executions for the
Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available
the following
programs designed to enable shareholders to add to their
investment or withdraw
from it with a minimum of paper work. These are described below
and, in certain
cases, in the Prospectus. The programs involve no extra charge
to shareholders
(other than a sales charge in the case of certain Class A share
purchases) and
may be changed or discontinued at any time by a shareholder or the
Fund.
LETTER OF INTENT: If a shareholder (other than a group
purchaser described
below) anticipates purchasing $50,000 or more of Class A
shares of the Fund
alone or in combination with any class of shares of other MFS
Funds or MFS Fixed
Fund (a bank collective investment fund) within a 13-month
period (or 36-month
period in the case of purchases of $1 million or more), the
shareholder may
obtain Class A shares of the Fund at the same reduced sales charge
as though the
total quantity were invested in one lump sum by completing the
Letter of Intent
section of the Account Application or filing a separate
Letter of Intent
application (available from the Shareholder Servicing Agent)
within 90 days of
the commencement of purchases. Subject to acceptance by MFD and
the conditions
mentioned below, each purchase will be made at a public
offering price
applicable to a single transaction of the dollar amount specified
in the Letter
of Intent application. The shareholder or his dealer must
inform MFD that the
Letter of Intent is in effect each time shares are purchased.
The shareholder
makes no commitment to purchase additional shares, but if his
purchases within
13 months (or 36 months in the case of purchases of $1 million or
more) plus the
value of shares credited toward completion of the Letter of
Intent do not total
the sum specified, he will pay the increased amount of the
sales charge as
described below. Instructions for issuance of shares in the
name of a person
other than the person signing the Letter of Intent
application must be
accompanied by a written statement from the dealer stating that
the shares were
paid for by the person signing such Letter. Neither income
dividends not capital
gain distributions taken in additional shares will apply toward
the completion
of the Letter of Intent. Dividends and distributions of
other MFS Funds
automatically reinvested in shares of the Fund pursuant to the
Distribution
Investment Program will also not apply toward completion of
the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent
purchases if
necessary), 5% of the dollar amount specified in the
Letter of Intent
application shall be held in escrow by the Shareholder
Servicing Agent in the
form of shares registered in the shareholder's name. All income
dividends and
capital gain distributions on escrowed shares will be paid to the
shareholder or
to his order. When the minimum investment so specified is
completed (either
prior to or by the end of the 13-month or 36-month period, as
applicable) the
shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder
Servicing Agent
will redeem an appropriate number of the escrowed shares in
order to realize
such difference. Shares remaining after any such redemption will
be released by
the Shareholder Servicing Agent. By completing and signing
the Account
Application or separate Letter of Intent application,
the shareholder
irrevocably appoints the Shareholder Servicing Agent his
attorney to surrender
for redemption any or all escrowed shares with full power of
substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for
cumulative quantity
discounts on the purchase of Class A shares when that
shareholder's new
investment, together with the current offering price value of
all the holdings
of all classes of shares of that shareholder in the MFS Funds or
MFS Fixed Fund
(a bank collective investment Fund), reaches a discount level.
See "Purchases"
in the Prospectus for the sales charges on quantity purchases. For
example, if a
shareholder owns shares with a current offering price value
of $37,500 and
purchases an additional $12,500 of Class A shares of the Fund,
the sales charge
for the $12,500 purchase would be at the rate of 4.75% (the rate
applicable to
single transactions of $50,000). A shareholder must provide
the Shareholder
Servicing Agent (or his investment dealer must provide MFD) with
information to
verify that the quantity sales charge discount is applicable
at the time the
investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and
capital gains
made by the Fund with respect to a particular class of
shares may be
automatically invested in shares of the same class of one of
the other MFS
Funds, if shares of the fund are available for sale. Such
investments will be
subject to additional purchase minimums. Distributions will be
invested at net
asset value (exclusive of any sales charge) and will not be
subject to any CDSC.
Distributions will be invested at the close of business on the
payable date for
the distribution. A shareholder considering the Distribution
Investment Program
should obtain and read the prospectus of the other fund and
consider the
differences in objectives and policies before making any
investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the
Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic
payments, as
designated on the Account Application and based upon the value
of his account.
Each payment under a Systematic Withdrawal Plan ("SWP") must be
at least $100,
except in certain limited circumstances. The aggregate
withdrawals of Class B
shares in any year pursuant to a SWP generally are limited to
10% of the value
of the account at the time of the establishment of the SWP. SWP
payments are
drawn from the proceeds of share redemptions (which would
be a return of
principal and, if reflecting a gain, would be taxable).
Redemptions of Class B
shares will be made in the following order: (i) any "Free
Amount"; (ii) to the
extent necessary, any "Reinvested Shares"; and (iii) to the
extent necessary,
the "Direct Purchase" subject to the lowest CDSC (as such terms
are defined in
"Contingent Deferred Sales Charge" in the Prospectus). The CDSC
will be waived
in the case of redemptions of Class B shares pursuant to a SWP
but will not be
waived in the case of SWP redemptions of Class A shares which
are subject to a
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 $10,000
either must be held on deposit by, or certificates for such
shares must be
deposited with, the Shareholder Servicing Agent. With respect to
Class A shares,
maintaining a withdrawal plan concurrently with an investment
program would be
disadvantageous because of the sales charges included in share
purchases and the
imposition of a CDSC on certain redemptions. The
shareholder by written
instruction to the Shareholder Servicing Agent may deposit
into the account
additional shares of the Fund, change the payee or change the
amount of each
payment. The Shareholder Servicing Agent may charge the
account for services
rendered and expenses incurred beyond those normally assumed by
the Fund with
respect to the liquidation of shares. No charge is currently
assessed against
the account, but one could be instituted by the Shareholder
Servicing Agent on
60 days' notice in writing to the shareholder in the event that
the Fund ceases
to assume the cost of these services. The Fund may terminate
any SWP for an
account if the value of the account falls below $5,000 as a
result of share
redemptions (other than as a result of a SWP) or an exchange of
shares of the
Fund for shares of another MFS Fund. Any SWP may be terminated
at any time by
either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the
Fund may be made
at any time by mailing a check payable to the Fund directly to
the Shareholder
Servicing Agent. The shareholder's account number and the name of
his investment
dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may
be treated as a
single purchaser and, under the Right of Accumulation (but not
the Letter of
Intent), obtain quantity sales charge discounts on the
purchase of Class A
shares if the group (1) gives its endorsement or authorization to
the investment
program so it may be used by the investment dealer to facilitate
solicitation of
the membership, thus effecting economies of sales effort;
(2) has been in
existence for at least six months and has a legitimate purpose
other than to
purchase mutual fund shares at a discount; (3) is not a group
of individuals
whose sole organizational nexus is as credit cardholders
of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer,
clients of an investment adviser or other similar groups; and
(4) agrees to
provide certification of membership of those members investing
money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account
balances of at least
$5,000 in any MFS Fund, may exchange their shares for the same
class of other
MFS Funds under the Automatic Exchange Plan. The Automatic
Exchange Plan
provides for automatic exchanges of funds from the shareholder's
account in an
MFS Fund for investment in the same class of shares of other MFS
Funds selected
by the shareholder. Under the Automatic Exchange Plan, exchanges
of at least $50
each may be made to up to four different funds effective on the
seventh day of
each month or of every third month, depending whether monthly
or quarterly
exchanges are elected by the shareholder. If the seventh day of
the month is not
a business day, the transaction will be processed on the next
business day.
Generally, the initial exchange will occur after receipt and
processing by the
Shareholder Servicing Agent of an application in good order.
Exchanges will
continue to be made from a shareholder's account in any MFS Fund,
as long as the
balance of the account is sufficient to complete the
exchanges. Additional
payments made to a shareholder's account will extend the period
that exchanges
will continue to be made under the Automatic Exchange Plan.
However, if
additional payments are added to an account subject to the
Automatic Exchange
Plan shortly before an exchange is scheduled, such funds may
not be available
for exchanges until the following month; therefore, care should be
used to avoid
inadvertently terminating the Automatic Exchange Plan through
exhaustion of the
account balance.
Exchanges will be charged in connection with the Automatic
Exchange Plan.
However, exchanges of shares of MFS Money Market Fund, MFS
Government Money
Market Fund and Class A shares of MFS Cash Reserve Fund will be
subject to any
applicable sales charge. Changes in amounts to be exchanged to
each fund, the
funds to which exchanges are to be made and the timing of
exchanges (monthly or
quarterly), or termination of a shareholder's participation in
the Automatic
Exchange Plan will be made after instructions in writing or by
telephone (an
"Exchange Change Request") are received by the Shareholder
Servicing Agent in
proper form (i.e., if in writing signed by the record
towner(s) exactly as
shares are registered; if by telephone proper account
identification is given by
the dealer or shareholder of record). Each Exchange Change
Request (other than
termination of participation in the program) must involve
at least $50.
Generally, if an Exchange Change Request is received by telephone
or in writing
before the close of business on the last business day of the
month, the Exchange
Change Request will be effective for the following month's
exchange.
A shareholder's right to make additional investments in any of the
MFS Funds, to
make exchanges of shares from one MFS Fund to another and to
withdraw from an
MFS Fund, as well as a shareholder's other rights and
privileges are not
affected by a shareholder's participation in the Automatic
Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege.
For additional
information regarding the Automatic Exchange Plan, including
the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and
shareholders of 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 such
shares are acquired through direct purchase or reinvested
dividends) who have
redeemed their shares have a one-time right to reinvest the
redemption proceeds
in the same class of shares of any of the MFS Funds (if 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 certain Class A shares, a CSDC will be
imposed upon
redemption. Although redemptions and repurchases of shares are
taxable events, a
reinvestment within a certain period of time in the same fund may
be considered
a "wash sale" and may result in the inability to recognize
currently all or a
portion of any loss realized on the original redemption for
federal income tax
purposes. Please see your tax adviser for further
information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth
below, some or all
of the shares in an account for which payment has been
received by the Fund
(i.e., an established account) may be exchanged for shares of the
same class of
any of the other MFS Funds (if available for sale) at net asset
value. Exchanges
will be made only after instructions in writing or by telephone
(an "Exchange
Request") are received for an established account by the
Shareholder Servicing
Agent.
Each Exchange Request must be in proper form (i.e., if in writing
signed by the
record owner(s) exactly as the shares are registered; if by
telephone proper
account identification is given by the dealer or shareholder of
record), and
each exchange must involve either shares having an aggregate
value of at least
$1,000 ($50 in the case of retirement plan participants
whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or
another similar
401(k) recordkeeping system made available by the Shareholder
Servicing Agent)
or all the shares in the account. Each exchange involves the
redemption of the
shares of the Fund to be exchanged and the purchase at net
asset value (i.e.,
without a sales charge) of shares of the same class of the other
MFS Fund. Any
gain or loss on the redemption of the shares exchanged is
reportable on the
shareholder's federal income tax return, unless both the shares
received and the
shares surrendered in the exchange are held in a tax-deferred
retirement plan or
other tax-exempt account. No more than five exchanges may be
made in any one
Exchange Request by telephone. If an Exchange Request is
received by the
Shareholder Servicing Agent prior to the close of regular
trading on the
Exchange, the Exchange usually will occur on that day if all of
the requirements
set forth above have been complied with at that time. However,
payment of the
redemption proceeds by the Fund, and thus the purchase of
shares of the other
MFS Fund, may be delayed for up to seven days if the Fund
determines that such a
delay would be in the best interest of all its shareholders.
Investment dealers
which have satisfied criteria established by MFD may also
communicate a
shareholder's Exchange Request to the Shareholder Servicing
Agent by facsimile
subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although
liability for the
CDSC is carried forward to the exchanged shares. For purposes of
calculating the
CDSC upon redemption of shares acquired in an exchange, the
purchase of shares
acquired in one or more exchanges is deemed to have occurred at
the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds,
including a copy of
its current prospectus, may be obtained from investment
dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange
should obtain
and read the prospectus of the other MFS Fund and consider the
differences in
objectives and policies before making any exchange. Shareholders
of the other
MFS Funds (except shares of MFS Money Market Fund, MFS Government
Money Market
Fund and Class A shares of Cash Reserve Fund for shares acquired
through direct
purchase and dividends reinvested prior to June 1, 1992)
have the right to
exchange their shares for shares of the Fund, subject to the
conditions, if any,
set forth in their respective prospectuses. In addition,
unitholders of the MFS
Fixed Fund have the right to exchange their units (except units
acquired through
direct purchases) for shares of the Fund, subject to the
conditions, if any,
imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each
state- specific
series of MFS Municipal Series Trust may only benefit residents
of such states.
Investors should consult with their own tax advisers to be
sure this is an
appropriate investment based on their residency and each
state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or
discontinued and
is subject to certain limitations (see "Purchases" in the
Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund are
available for purchase
by all types of tax-deferred retirement plans. MFD makes
available through
investment dealers plans and/or custody agreements for the
following:
Individual Retirement Accounts (IRAs) (for individuals and their
non- employed
spouses who desire to make limited contributions to a tax-
deferred retirement
program and, if eligible, to receive a federal income tax
deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code
of 1986, as amended;
403(b) Plans (deferred compensation arrangements for
employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or
custodian (unless
another trustee or custodian is designated by the
individual or group
establishing the plan) and contain specific information about
the plans. Each
plan provides that dividends and distributions will be reinvested
automatically.
For further details with respect to any plan, including fees
charged by the
trustee, custodian or MFD, tax consequences and redemption
information, see the
specific documents for that plan. Plan documents other than
those provided by
MFD may be used to establish any of the plans described above.
Third party
administrative services, available for some corporate plans, may
limit or delay
the processing of transactions.
An investor should consult with his tax adviser before
establishing any of the
tax-deferred retirement plans described above.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify
each year as a
"regulated investment company" under Subchapter M of the
Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable
requirements of
Subchapter M, including requirements as to the nature of the
Fund's gross
income, the amount of Fund distributions, and the composition and
holding period
of the Fund's portfolio assets. Because the Fund intends to
distribute all of
its net investment income and net realized capital gains to
shareholders in
accordance with the timing requirements imposed by the Code, it
is not expected
that the Fund will be required to pay any federal income or
excise taxes,
although the Fund's foreign-source income may be subject to
foreign withholding
taxes. If the Fund should fail to qualify as a "regulated
investment company" in
any year, the Fund would incur a regular corporate federal
income tax upon its
taxable income and Fund distributions would generally be
taxable as ordinary
dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income
taxes, and any
state or local taxes, on the dividends and capital gain
distributions they
receive from the Fund. Dividends from income, including certain
foreign currency
gains, and any distributions from net short-term capital
gains, (whether
received in cash or reinvested in additional shares) are taxable
to shareholders
as ordinary income for federal income tax purposes. A portion
of the Fund's
ordinary income dividends (but none of its capital gains) is
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 and result in certain basis adjustments.
Distributions of net
capital gain (i.e., the excess of the net long-term capital
gains over the
short-term capital losses), whether received in cash or invested
in additional
shares, are taxable to the Fund's shareholders as long-term
capital gains for
federal income tax purposes regardless of how long they have owned
shares in the
Fund. Fund dividends declared in October, November, or December
to shareholders
and paid the following January will be taxable to shareholders as
if received on
December 31 of the year in which they are declared.
Any dividend or distribution will have the effect of reducing the
per share net
asset value of shares in the Fund by the amount of the dividend or
distribution.
Shareholders purchasing shares shortly before the record
date of any
distribution may thus pay the full price for the shares and
then effectively
receive a portion of the purchase price back as a taxable
distribution.
The Fund's current dividend and accounting policies will
affect the amount,
timing, and character of distributions to shareholders, and may,
under certain
circumstances, make an economic return of capital taxable to
shareholders. In
general, any gain or loss realized upon a taxable disposition of
shares of the
Fund by a shareholder that holds such shares as a capital asset
will be treated
as long-term capital gain or loss if the shares have been held
for more than
twelve months and otherwise as a short-term capital gain or loss.
However, any
loss realized upon a disposition of shares in the Fund held for
six months or
less will be treated as long-term capital loss to the
extent of any
distributions of net capital gain made with respect to those
shares. Any loss
realized upon a redemption of shares may also be disallowed under
rules relating
to wash sales. Gain may be increased (or loss reduced) upon a
redemption of
Class A shares of the Fund within ninety days after their
purchase followed by
any purchase (including purchases by exchange or by reinvestment)
of the Fund or
of another MFS Fund (or other shares of an MFS Fund generally
sold subject to a
sales charge) without payment of an additional sales charge of
Class A shares .
The Fund's investment in certain securities purchased at a market
discount will
cause it to realize income prior to the receipt of cash payments
with respect to
those securities. In order to distribute this income and
avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities
that it might
otherwise have continued to hold, potentially resulting in
additional taxable
gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts and Forward
Contracts will
be subject to special tax rules that may affect the amount, timing
and character
of Fund income and distributions to shareholders. For example,
certain positions
held by the Fund on the last business day of each taxable year
will be marked to
market (i.e., treated as if closed out) on such day, and
any gain or loss
associated with the positions will be treated as 60% long-
term and 40%
short-term capital gain or loss. Certain positions held by
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, Forward
Contracts and
Futures Contracts to the extent necessary to meet the requirements
of Subchapter
M of the Code.
Special tax considerations apply with respect to foreign
investments of the
Fund. Foreign exchange gains and losses realized by the Fund
will generally be
treated as ordinary income or losses. The holding 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" of the last day of each year. This election may
cause the Fund to
recognize income prior to the receipt of cash payments with
respect to those
investments; in order to distribute this income and avoid a tax on
the Fund, the
Fund may be required to liquidate portfolio securities that it
might otherwise
have continued to hold.
Investment income received by the Fund from sources within foreign
countries may
be subject to foreign income taxes withheld at the source; the
Fund does not
expect to be able to pass through to shareholders foreign tax
credits with
respect to such foreign taxes. The United States has entered
into tax treaties
with many foreign countries that may entitle the Fund to a
reduced rate of tax
or an exemption from tax on such income; the Fund intends to
qualify for treaty
reduced rates of tax where available. It is impossible to
determine the
effective rate of foreign tax in advance since the amount of the
Fund's assets
to be invested within various countries is not known.
Dividends and certain other payments to persons who are not
citizens or
residents of the United States or U.S. entities ("Non-U.S.
Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The
Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable
dividends and
other payments to Non-U.S. Persons that are subject to such
withholding,
regardless of whether a lower treaty rate may be permitted.
Any amounts
overwithheld may be recovered by such persons by filing a claim
for refund with
the U.S. Internal Revenue Service within the time period
appropriate to such
claims. The Fund is also required in certain circumstances to
apply backup
withholding of 31% on taxable dividends and redemption
proceeds paid to any
shareholder who does not furnish to the Fund certain
information and
certifications or who is otherwise subject to backup
withholding. Backup
withholding will not, however, be applied to payments that have
been subject to
30% withholding. Distributions received from the Fund by Non-
U.S. Persons may
also be subject to tax under the laws of their own jurisdiction.
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.
8. DETERMINATION OF NET ASSET VALUE;
PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of each class of the Fund is
determined each day
during which the Exchange is open for trading. As of the date of
this SAI, the
Exchange is open for trading every weekday except for the
following holidays (or
the days on which they are observed: New Year's Day,
Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and
Christmas Day). This determination is made once during each such
day as of the
close of regular trading on the Exchange by deducting the
amount of the
liabilities attributable to the class from the value of the
assets attributable
to the class and dividing the difference by the number of
shares of the class
outstanding. Forward Contracts will be valued using a pricing
model taking into
consideration market data from an external pricing source. Use
of the pricing
services has been approved by the Board of Trustees. All
other securities,
futures contracts and options in the Fund's portfolio (other
than short-term
obligations) for which the principal market is one or more
securities or
commodities exchanges (whether domestic or foreign) will be
valued at the last
reported sale price or at the settlement price prior to the
determination (or if
there has been no current sale, at the closing bid price)
on the primary
exchange on which such securities, Futures Contracts or options
are traded; but
if a securities exchange is not the principal market for
securities, such
securities will, if market quotations are readily available,
be valued at
current bid prices, unless such securities are reported on the
NASDAQ system, in
which case they are valued at the last sale price or, if no
sales occurred
during the day, at the last quoted bid price. Debt securities
(other than
short-term obligations but including listed issues) in the Fund's
portfolio are
valued on the basis of valuations furnished by a pricing service
which utilizes
both dealer-supplied valuations and electronic data processing
techniques which
take into account appropriate factors such as institutional-
sized trading in
similar groups of securities, yields, quality, coupon rate,
maturity, type of
issue, trading characteristics and other market data, without
exclusive reliance
upon quoted prices or exchange or over-the-counter prices, since
such valuations
are believed to reflect more accurately the fair value of
such securities.
Short-term obligations, if any, in the Fund's portfolio are
valued at amortized
cost, which constitutes fair value as determined by the Board
of Trustees.
Short-term securities with a remaining maturity in excess of
60 days will be
valued based upon dealer supplied valuations. Portfolio
securities and
over-the-counter options and Forward Contracts, for which
there are no
quotations or valuations are valued at fair value as determined in
good faith by
or at the direction of the Board of Trustees. A share's net
asset value is
effective for orders received by the dealer prior to its
calculation and
received by MFD, in its capacity as the Fund's distributor or
its agent, the
Shareholder Servicing Agent, prior to the close of the business
day.
PERFORMANCE INFORMATION
The Fund will calculate its total rate of return for each class
of shares for
certain periods by determining the average annual compounded
rates of return
over those periods that would cause an investment of $1,000
(made with all
distributions reinvested and reflecting the CDSC or the maximum
public offering
price) to reach the value of that investment at the end of the
periods. The Fund
may also calculate (i) a total rate of return, which is not
reduced by the CDSC
(5% maximum for Class B shares purchased on and after January
1, 1993, but
before September 1, 1993 and 4% maximum for Class B shares
purchased on and
after September 1, 1993) and therefore may result in a higher
rate of return,
(ii) a total rate of return assuming an initial account value of
$1,000, which
will result in a higher rate of return since the value of the
initial account
will not be reduced by the sales charge (5.75% maximum) 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 average annual total rate of
return for Class B
shares, reflecting the CDSC, for the one-year and five-year
periods ended
November 30, 1994 and for the period from December 29, 1986
(the Fund's
commencement of investment operations) to November 30, 1994 are
4.21%, 21.06%
and 17.80%, respectively. The average annual total rates of
return for Class B
shares, not giving effect to the CDSC, for the one-year and
five year periods
ended November 30, 1994 and for the period from December 29,
1986 (the Fund's
commencement of investment operations) to November 30, 1994 are
8.21%, 21.24%
and 17.80%, respectively. The Fund's average annual total rate
of return for
Class A shares, reflecting the initial investment at the current
maximum public
offering price, for the one-year period ended November 30,
1994 and for the
period from September 13, 1993 through November 30, 1994 was
2.79% and 8.68%,
respectively. The Fund's average annual total rate of return for
Class A shares,
not giving effect to the sales charge on the initial investment
for the one-year
period ended November 30, 1994 and for the period from
September 13, 1993
through November 30, 1994 was 9.06% and 14.10%, respectively.
PERFORMANCE RESULTS -- The performance results below, based
on an assumed
initial investment of $10,000 in Class B shares, cover the period
from December
29, 1986 through December 31, 1994. It has been assumed that
dividend and
capital gain distributions were reinvested in additional shares.
Any performance
results or total rate of return quotation provided by the Fund
should not be
considered as representative of the performance of the Fund in
the future since
the net asset value of shares of the Fund will vary based not
only on the type,
quality and maturities of the securities held in the Fund's
portfolio, but also
on changes in the current value of such securities and on
changes in the
expenses of the Fund. These factors and possible differences in
the methods used
to calculate total rates of return should be considered when
comparing the total
rate of return of the Fund to total rates of return
published for other
investment companies or other investment vehicles. Total rate of
return reflects
the performance of both principal and income. Current net
asset value and
account balance information may be obtained by calling 1-
800-MFS-TALK
(637-8255).
<PAGE>
<TABLE>
<CAPTION>
MFS
EMERGING GROWTH FUND -- CLASS B
-------------------
- -------------------------------------------
VALUE OF
VALUE OF
INITIAL
REINVESTED VALUE OF
$10,000
CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT
DISTRIBUTIONS ---------- VALUE
- ---------- ---------- -
- ------------ DIVIDENDS -----
<S> <C>
<C> <C> <C>
December 31, 1986<F1>........................ $ 9,981
$ 0 $ 0 $ 9,981
December 31, 1987<F1>........................ 10,454
0 0 10,454
December 31, 1988............................ 11,290
0 0 11,290
December 31, 1989............................ 14,327
0 0 14,327
December 31, 1990............................ 13,963
0 0 13,963
December 31, 1991............................ 25,072
1,125 0 26,197
December 31, 1992............................ 27,727
1,539 0 29,266
December 31, 1993............................ 33,454
2,640 204 36,298
December 31, 1994............................ 34,345
3,018 388 37,751
<FN>
- ---------
<F1> For the period from the start of business, December 29,
1986, through
December 31, 1987.
</TABLE>
EXPLANATORY NOTES: The results in the table take into account the
annual Rule
12b-1 fees but not the CDSC. No adjustment has been made for any
income taxes
payable by shareholders.
From time to time the Fund may, as appropriate, quote Fund
rankings or reprint
all or a portion of evaluations of fund performance and operations
appearing in
various independent publications, including but not limited to
the following:
Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily,
Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today,
Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered
Representative,
Institutional Investor, the Investment Company Institute,
Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger,
Shearson Lehman
and Saloman Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media
General, Investment Company Data, The New York Times, Your
Money, Strangers
Investment Advisor, Financial Planning on Wall Street,
Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy
by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein
& Co. Fund
performance may also be compared to the performance of other
mutual funds
tracked by financial or business publications or periodicals. The
Fund may also
quote evaluations mentioned in independent radio or television
broadcasts and
may use charts and graphs to illustrate the past performance of
various indices
such as those mentioned above and illustrations using
hypothetical rates of
return to illustrate the effects of compounding and tax-deferral.
The Fund may
advertise examples of the effects of periodic investment plans,
including the
principle of dollar cost averaging. In such a program, an
investor invests a
fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer
shares when prices are high and more shares when prices are low.
While such a
strategy does not assure a profit or guard against a loss in a
declining market,
the investor's average cost per share can be lower than if
fixed numbers of
shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the
first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first
mutual fund to make
full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to
provide in-house analytical capability for an investment
management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual
fund to register
under the Securities Act of 1933 ("Truth in Securities
Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual
fund to allow
shareholders to take capital gain distributions either
in additional
shares or cash.
-- 1976 -- MFS Municipal Bond Fund is among the first
municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination
fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS World Governments Fund is established as
America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first open-
end mutual fund
to seek high tax-free income from lower-rated municipal
securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual
fund to target
and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-
end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first-closed-
end, multimarket
high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS Regatta becomes America's first non-qualified
market-value-
adjusted fixed/variable annuity.
-- 1990 -- MFS World Total Return Fund is the first global
balanced fund.
-- 1993 -- MFS World Growth Fund is the first global emerging
markets fund to
offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS Union Standard
Trust, the first
Trust to invest in companies deemed to be union-friendly
by an Advisory
Board of senior labor officials, senior managers of
companies with
significant labor contracts, academics and other national
labor leaders or
experts.
9. DISTRIBUTION PLANS
CLASS A DISTRIBUTION PLAN: The Trustees have adopted a
Distribution Plan
relating to Class A shares (the "Class A 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 Class
A Distribution
Plan would benefit the Fund and its Class A shareholders.
The Class A
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 effects that could
result were the
Fund required to liquidate portfolio securities to meet
redemptions.
The Class A Distribution Plan provides that the Fund will pay MFD
up to (but not
necessarily all of) an aggregate of 0.35% of the average
daily net assets
attributable to the Class A shares annually in order that MFD
may pay expenses
on behalf of the Fund related to the distribution and servicing
of its Class A
shares. The expenses to be paid by MFD on behalf of the Fund
include a service
fee to securities dealers which enter into a sales agreement
with MFD of up to
0.25% per annum of the portion of the Fund's average
daily net assets
attributable to the Class A shares owned by investors for whom
that securities
dealer is the holder or dealer of record. These payments
are partial
consideration for personal services and/or account maintenance
performed by such
dealers with respect to Class A shares. MFD may from time to
time reduce the
amount of the service fee paid for shares sold prior to a certain
date. MFD may
also retain a distribution fee of 0.10% per annum of the Fund's
average daily
net assets attributable to Class A shares as partial
consideration for services
performed and expenses incurred in the performance of MFD's
obligations as to
Class A shares under the Distribution Agreement with the Fund.
MFD, however, is
currently waiving this 0.10% per annum distribution fee and
will not accept
future payments of this fee unless it first obtains the approval
of the Trust's
Board of Trustees. Any remaining funds may be used to pay for
other distribution
related expenses as described in the Prospectus. Service fees may
be reduced for
a securities dealer that is the holder or dealer of record for
an investor who
owns shares of the Fund having a net asset value at or above a
certain dollar
level. No service fee will be paid (i) to any securities
dealer who is the
holder or dealer of record for investors who own 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 if the dealer satisfies certain criteria),
or (ii) to any
insurance company which has entered into an agreement with the
Fund and MFD that
permits such insurance company to purchase shares from the
Fund at their net
asset value in connection with annuity agreements issued in
connection with the
insurance company's separate accounts. Dealers may from time to
time be required
to meet certain other criteria in order to receive service
fees. MFD or its
affiliates are entitled to retain all service fees payable
under the Class A
Distribution Plan for which there is no dealer of record
or for which
qualification standards have not been met as partial
consideration for personal
services and/or account maintenance services performed by MFD or
its affiliates
for shareholder accounts. Certain banks and other financial
institutions that
have agency agreements with MFD will receive agency transaction
and service fees
that are the same as commissions and service fees to dealers.
The Class A Distribution Plan will remain in effect until August
1, 1995, and
will continue in effect thereafter only if such continuance is
specifically
approved at least annually by vote of both the Trustees and a
majority of the
Trustees who are not "interested persons" or financially
interested parties to
the Plan ("Class A Distribution Plan Qualified Trustees").
The Class A
Distribution Plan requires that the Fund and MFD each shall
provide to the
Trustees, and the Trustees shall review, at least quarterly, a
written report of
the amounts expended (and purposes therefor) under such
Plan. The Class A
Distribution Plan may be terminated at any time by vote of a
majority of the
Class A Distribution Plan Qualified Trustees or by vote of
the holders of a
majority of the Fund's Class A shares (as defined in "Investment
Restrictions").
Agreements under the Class A 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 Class A
Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
Fund's Class A
shares. The Class A Distribution Plan may not be amended to
increase materially
the amount of permitted distribution expenses without the approval
of a majority
of the Fund's Class A shares (as defined in "Investment
Restrictions") and may
not be materially amended in any case without a vote of the
Trustees and a
majority of the Class A Distribution Plan Qualified Trustees. No
Trustee who is
not an "interested person" has any financial interest in
the Class A
Distribution Plan or in any related agreement.
During the fiscal year ended November 30, 1994, the Fund
incurred expenses of
$1,522,184 (equal to 0.35% of its average daily net assets,
annualized) relating
to the distribution and servicing of its Class A shares, of
which MFD waived
$435,336 (0.10% of its average daily net assets attributable to
Class A shares,
annualized) and securities dealers of the Fund and certain
banks and other
financial institutions received $1,086,848 (0.25% of its
average daily net
assets attributable to Class A shares, annualized), of which
MFD retained
$192,412.
CLASS B DISTRIBUTION PLAN: The Trustees of the Fund have
adopted a
Distribution Plan relating to Class B shares (the "Class B
Distribution Plan")
pursuant to Section 12(b) of the 1940 Act and the Rule, after
having concluded
that there was a reasonable likelihood that the Class B
Distribution Plan would
benefit the Fund and the Class B shareholders of the Fund.
The Class B
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 effects that could
result were the
Fund required to liquidate portfolio securities to meet
redemptions. There is,
however, no assurance that the net assets of the Fund will
increase or that the
other benefits referred to above will be realized.
The Class B Distribution Plan provides that the Fund shall
pay MFD, as the
Fund's distributor for its Class B shares, a daily distribution
fee equal on an
annual basis to 0.75% of the Fund's average daily net assets
attributable to
Class B shares and will pay MFD a service fee of up to 0.25%
per annum of the
Fund's average daily net assets attributable to Class B shares
(which MFD will
in turn pay to securities dealers which enter into a sales
agreement with MFD at
a rate of up to 0.25% per annum of the Fund's average
daily net assets
attributable to Class B shares owned by investors for whom
that securities
dealer is the holder or dealer of record). This service fee is
intended to be
additional considertion for all personal services and/or
account maintenance
services rendered by the dealer with respect to Class B shares.
MFD will advance
to dealers the first-year service fee at a rate equal to 0.25%
per annum of the
amount invested. 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 for additional service fees with
respect to such
shares commencing in the thirteenth month following purchase.
Except in the case
of the first year service fee, no service fee 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 from time to time by MFD. MFD,
however, may waive
this minimum amount requirement from time to time if the
dealer satisfies
certain criteria. Dealers may from time to time be required to
meet certain
other criteria in order to receive service fees. MFD or its
affiliates are
entitled to retain all service fees payable under the Class B
Distribution Plan
for which there is no dealer of record or for which qualification
standards have
not been met as partial consideration for personal services
and/or account
maintenance services performed by MFD or its affiliates
for shareholder
accounts.
The purpose of distribution payments to MFD under the Class B
Distribution Plan
is to compensate MFD for its distribution services to the
Fund. MFD pays
commissions to dealers as well as expenses of printing
prospectuses and reports
used for sales purposes, expenses of the preparation and
printing of sales
literature and other distribution related expenses,
including, without
limitation, the cost necessary to provide distribution-related
services, of
personnel, travel, office expenses and equipment. The Class B
Distribution Plan
also provides that MFD will receive all CDSCs relating to Class
B shares (see
"Distribution Plans" and "Purchases" in the Prospectus).
During the fiscal year ended November 30, 1994, the Fund
incurred expenses of
$7,376,364 (equal to 1.00% of its average daily net assets,
annualized) relating
to the distribution and servicing of its Class B shares, of
which MFD retained
$131,877.
In accordance with the Rule, all agreements relating to the Class
B 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
Trustees who are
not "interested persons" (as defined in the 1940 Act) and who
have no direct or
indirect financial interest in the operation of the Class B
Distribution Plan or
in any agreement related to such Plan ("Class B Distribution
Plan Qualified
Trustees"). The Class B Distribution Plan further provides that
the selection
and nomination of Class B Distribution Plan Qualified
Trustees shall be
committed to the discretion of the non-interested Trustees then in
office.
The Class B Distribution Plan will remain in effect until August
1, 1995, and
will continue in effect thereafter only if such continuance is
specifically
approved at least annually by vote of both the Trustees and a
majority of the
Class B Distribution Plan Qualified Trustees. The Class B
Distribution Plan
requires that the Fund shall provide to the Trustees, and the
Trustees shall
review, at least quarterly, a written report of the amounts
expended (and
purposes therefor) under such Plan. The Class B
Distribution Plan may be
terminated at any time by vote of a majority of the Class B
Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
Class B shares
of the Fund (as defined in "Investment Restrictions" above).
The Class B
Distribution Plan may not be amended to increase materially
the amount of
permitted distribution expenses without the approval of Class B
shareholders and
may not be materially amended in any case without a vote of the
majority of both
the Trustees and the Class B Distribution Plan Qualified
Trustees. No Trustee
who is not an interested person of the Fund has any financial
interest in the
Class B Distribution Plan or in any related agreement.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the
Fund to issue an
unlimited number of full and fractional Shares of Beneficial
Interest (without
par value) of one or more separate series and to divide or combine
the shares of
any series into a greater or lesser number of shares without
thereby changing
the proportionate beneficial interests in that series. The
Trustees have
currently authorized shares of the Fund and three other series.
The Declaration
of Trust further authorizes the Trustees to classify or reclassify
any series of
shares into one or more classes. Pursuant thereto, the Trustees
have authorized
the issuance of two classes of shares of each of the Trust's four
series, Class
A shares and Class B shares. Each share of a class of the Fund
represents an
equal proportionate interest in the assets of the Fund allocable
to that class.
Upon liquidation of the Fund, shareholders of each class are
entitled to share
pro rata in the net assets of the Fund allocable to such class
available for
distribution to shareholders. The Trust reserves the right to
create and issue
additional series or classes of shares, in which case the shares
of each class
would participate equally in the earnings, dividends and assets
allocable to
that class of the particular series.
Shareholders are entitled to one vote for each share held and
may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders.
Although Trustees are not elected annually by the shareholders,
shareholders
have under certain circumstances the right to remove one or
more Trustees in
accordance with the provisions of Section 16(c) of the 1940
Act. No material
amendment may be made to the Declaration of Trust without the
affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive
or conversion
rights (except as described in "Purchases -- Conversion of
Class B Shares" in
the Prospectus). Shares are fully paid and non-assessable. The
Trust may enter
into a merger or consolidation, or sell all or substantially all
of its assets
(or all or substantially all of the assets belonging to any
series of the
Trust), if approved by the vote of the holders of two-thirds
of the Trust's
outstanding shares voting as a single class, or of the affected
series of the
Trust, as the case may be, except that if the Trustees of the
Trust recommend
such merger, consolidation or sale, the approval by vote of
the holders of a
majority of the Trust's or the affected series" outstanding
shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any
series of the
Trust may also be terminated (i) upon liquidation and
distribution of its
assets, if approved by the vote of the holders of two-thirds of
its outstanding
shares, or (ii) by the Trustees by written notice to the
shareholders of the
Trust or the affected series. If not so terminated, the Trust
will continue
indefinitely.
The Trust is an entity of the type commonly known as a
"Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may,
under certain
circumstances, be held personally liable as partners for its
obligations.
However, the Declaration of Trust contains an express disclaimer
of shareholder
liability for acts or obligations of the Trust and provides for
indemnification
and reimbursement of expenses out of Trust property for any
shareholder held
personally liable for the obligations of the Trust. The
Declaration of Trust
also provides that it shall maintain appropriate insurance
(for example,
fidelity bonding and errors and omissions insurance) for the
protection of the
Trust, its shareholders, Trustees, officers, employees and
agents covering
possible tort or other liabilities. Thus, the risk of a
shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances
in which both inadequate insurance existed and the Trust itself
was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the
Trust are not
binding upon the Trustees individually but only upon the
property of the Trust
and that the Trustees will not be liable for any action or
failure to act, but
nothing in the Declaration of Trust protects a Trustee against
any liability to
which he would otherwise be subject by reason of willful
misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of
his office.
11. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent certified public
accountants.
The Portfolio of Investments at November 30, 1994, the Statement
of Assets and
Liabilities at November 30, 1994, the Statement of Operations for
the year ended
November 30, 1994, the Statement of Changes in Net Assets for
each of the two
years in the period ended November 30, 1994, the Financial
Highlights table for
each of the eight years in the period ended November 30, 1994,
the Notes to
Financial Statements and the Independent Auditors" Report,
each of which is
included in the Annual Report to shareholders of the Fund, are
incorporated by
reference into this SAI and have been so incorporated in
reliance upon the
report of Deloitte & Touche LLP, independent certified public
accountants, as
experts in accounting and auditing. A copy of the Annual Report
accompanies this
SAI.
<PAGE>
<TABLE>
APPENDIX A
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT
ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF
CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND<F1> FUND EXPENSE<F1>
OF SERVICE<F2> FUND COMPLEX<F3>
- ------------------------------------------------------------------
- -----------------------------------
<S> <C> <C>
<C> <C>
Walter E. Robb, III $3,950 $1,790
15 $147,274
Richard B. Bailey 3,275 525
10 226,221
Marshall N. Cohan 3,950 1,566
14 147,274
Sir David Gibbons 3,500 1,095
13 132,024
Ward Smith 3,950 417
13 147,274
Abby M. O'Neill 3,275 327
10 125,924
Dr. Lawrence Cohn 3,500 153
18 133,524
J. Dale Sherratt 3,950 175
20 147,274
<FN>
<F1> For fiscal year ended November 30, 1994.
<F2> Based on normal retirement age of 75.
<F3> Information provided is for calendar year 1994. All
Trustees served as
Trustees of 36 funds within the MFS fund complex (having
aggregate net
assets at December 31, 1994, of approximately
$9,746,460,756) except Mr.
Bailey, who served as Trustee of 56 funds within the MFS
fund complex
(having aggregate net assets at December 31, 1994, of
approximately
$24,474,119,825).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON
RETIREMENT(4)
YEARS OF SERVICE
----------------------------
- ------------
AVERAGE TRUSTEE FEES 3 5 7
10 OR MORE
- ------------------------------------------------------------------
- ------------
$2,950 $443 $ 738 $1,033
$1,475
3,230 485 808 1,131
1,615
3,510 527 878 1,229
1,755
3,790 569 948 1,327
1,895
4,070 611 1,018 1,425
2,035
4,350 653 1,088 1,523
2,175
(4) Other funds in the MFS fund complex provide similar
retirement benefits to
the Trustees.
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial
Services Company
500 Boylston Street, Boston,
MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston,
MA 02116
(617) 954-5000
CUSTODIAN
State Street Bank & Trust
Company
225 Franklin Street, Boston,
MA 02110
DIVIDEND DISBURSING AGENT
State Street Bank and Trust
Company
225 Franklin Street, Boston,
MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston,
MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS
P.O. Box 2281, Boston, MA
02107-9906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA
02110
MFS(R)
EMERGING
GROWTH
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS Logo]
THE FIRST NAME IN MUTUAL FUNDS
Printed on recycled paper.
MEG-13-
4/95/.5M 7/207
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - November 30, 1994
Common Stocks and Warrants - 97.2%
- -----------------------------------------------------------------------------
<CAPTION>
Issuer Shares Value
- -----------------------------------------------------------------------------
<S> <C> <C>
Apparel and Textiles - 1.2%
Donnkenny, Inc.<F1> 68,500 $ 933,312
Nine West Group, Inc.<F1> 445,000 11,013,750
Norton McNaughton, Inc.<F1> 20,000 270,000
Team Rent Group, Inc.<F1> 125,000 1,187,500
--------------
$ 13,404,562
- -----------------------------------------------------------------------------
Automotive - 0.4%
APS Holding Corp.<F1> 160,000 $ 4,050,000
Automotive Industries Holdings, Inc.<F1> 25,000 450,000
Deflecta-Shield Corp.<F1> 36,400 313,950
Tower Automotive, Inc.<F1> 42,400 365,700
--------------
$ 5,179,650
- -----------------------------------------------------------------------------
Banks and Credit Companies
Turkiye Garanti Bankasi<F2> 160,000 $ 400,000
- -----------------------------------------------------------------------------
Building
Universal Forest Products, Inc. 65,000 $ 406,250
- -----------------------------------------------------------------------------
Business Machines - 0.2%
Affiliated Computer Co.<F1> 85,300 $ 1,663,350
CMC Industries, Inc.<F1> 75,200 366,600
Mattson Technology Industries<F1> 23,300 471,825
--------------
$ 2,501,775
- -----------------------------------------------------------------------------
Business Services - 6.3%
Accustaff, Inc.<F1> 35,500 $ 439,312
Arden Industrial Products<F1> 5,000 36,875
BISYS Group, Inc.<F1> 250,000 5,406,250
CUC International, Inc.<F1> 1,378,000 42,373,500
Career Horizons, Inc.<F1> 10,000 152,500
Equity Corp. International<F1> 125,000 1,703,125
Fiserv, Inc.<F1> 247,500 5,259,375
Interim Services, Inc.<F1> 171,600 4,247,100
Investment Technology Group, Inc.<F1> 43,800 405,150
Rural/Metro Corp.<F1> 185,500 3,339,000
SPS Transaction Services, Inc.<F1> 395,200 10,077,600
Stewart Enterprises, Inc. 177,400 4,213,250
TRM Copy Centers Corp.<F1> 18,700 88,825
--------------
$ 77,741,862
- -----------------------------------------------------------------------------
Cellular Phones - 0.3%
AirTouch Communications, Inc.<F1> 55,000 $ 1,491,875
CellStar Corp.<F1> 150,000 2,775,000
--------------
$ 4,266,875
- -----------------------------------------------------------------------------
Computer Software - 0.1%
Epic Design Technology, Inc.<F1> 15,900 $ 335,887
Network Peripherals<F1> 30,000 765,000
--------------
$ 1,100,887
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 5.2%
Atria Software, Inc.<F1> 8,679 $ 234,333
Autodesk, Inc. 1,555,000 58,506,875
Electronic Arts, Inc.<F1> 50,000 993,750
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - continued
Learning Co.<F1> 5,000 $ 113,750
Powersoft Corp.<F1> 10,000 753,750
Saber Software Corp.<F1> 31,000 263,500
Softdesk, Inc.<F1> 52,500 1,220,625
State of the Art, Inc.<F1> 170,000 1,168,750
Tower Semiconductor Ltd.<F1> 60,000 795,000
--------------
$ 64,050,333
- -----------------------------------------------------------------------------
Computer Software - Systems - 17.1%
Aspen Technology, Inc.<F1> 39,700 $ 669,937
Cadence Design Systems, Inc.<F1> 1,475,000 30,421,875
Compuware Corp.<F1> 565,100 20,908,700
Informix Corp.<F1> 862,200 24,788,250
Keane, Inc.<F1> 190,400 4,284,000
Marcam Corp.<F1><F4> 596,800 5,968,000
Oracle Systems Corp.<F1> 2,160,000 89,100,000
Pinnacle Systems, Inc.<F1> 14,900 158,312
Pri Automation, Inc.<F1> 13,800 231,150
Quickturn Design System, Inc.<F1> 66,000 800,250
Shiva Corp.<F1> 29,700 920,700
Sybase, Inc.<F1> 220,000 10,725,000
System Software Associates, Inc.<F1><F4> 1,539,600 22,324,200
--------------
$ 211,300,374
- -----------------------------------------------------------------------------
Construction Services - 0.1%
Martin Marietta Materials, Inc. 30,000 $ 540,000
Shaw Group, Inc.<F1> 159,400 727,262
--------------
$ 1,267,262
- -----------------------------------------------------------------------------
Consumer Goods and Services - 1.1%
American Recreation<F1> 159,000 $ 1,272,000
Amrion, Inc.<F1> 22,500 151,875
Blyth Industries, Inc.<F1> 40,000 1,040,000
Bollinger Industries, Inc.<F1> 58,000 725,000
Bombay Co., Inc.<F1> 50,000 531,250
Cerplex Group, Inc.<F1> 140,800 1,654,400
Club Car, Inc.<F1> 81,900 1,208,025
First Alert, Inc.<F1> 20,000 370,000
Fresh America Corp.<F1> 85,000 743,750
Loewenstein Furniture Group<F1> 15,000 108,750
O'Sullivan Industries Holdings<F1> 198,600 2,283,900
Perrigo Co.<F1> 200,000 2,400,000
Score Board, Inc.<F1> 199,400 797,600
Strategic Distribution, Inc.<F1> 85,000 350,625
--------------
$ 13,637,175
- -----------------------------------------------------------------------------
Electrical Equipment
Gtech Holdings Corp.<F1> 20,000 $ 372,500
- -----------------------------------------------------------------------------
Electronics - 2.1%
Actel Corp.<F1> 40,000 $ 330,000
Altera Corp.<F1> 130,000 5,005,000
Flextronics International Ltd.<F1> 51,500 759,625
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Electronics - continued
Linear Technology Corp. 125,000 $ 6,031,250
Micro Linear Corp.<F1> 98,600 739,500
Novellus Systems, Inc.<F1> 157,000 8,183,625
Quality Semiconductor, Inc.<F1> 16,000 196,000
Xilinx, Inc.<F1> 71,100 4,159,350
--------------
$ 25,404,350
- -----------------------------------------------------------------------------
Entertainment - 8.0%
Argosy Gaming Corp.<F1> 252,600 $ 3,031,200
Boomtown, Inc.<F1><F2> 87,000 1,109,250
Casino America, Inc.<F1> 666,400 5,747,700
Central European Media Enterprises Ltd.<F1> 21,700 329,568
Discovery Zone, Inc.<F1> 122,600 1,731,725
EZ Communications, Inc.<F1> 40,000 550,000
Grand Casinos, Inc.<F1> 694,300 9,720,200
Harveys Casino Resorts 28,800 388,800
Heftel Broadcasting Corp., "A"<F1> 164,000 2,234,500
Heritage Media Corp.<F1> 54,300 1,303,200
Hollywood Casino Corp.<F1> 132,700 663,500
Hollywood Park, Inc. 210,625 2,158,906
Infinity Broadcasting<F1> 77,700 2,331,000
International Family Entertainment<F1> 40,000 555,000
Jacor Communications, Inc., "A"<F1> 35,000 402,500
Lodgenet Entertainment Corp.<F1> 45,300 351,075
Marvel Entertainment Group, Inc.<F1> 94,336 1,521,168
Monarch Casino & Resort, Inc.<F1> 145,000 1,232,500
National Gaming Corp.<F1><F4> 243,000 4,070,250
Players International, Inc.<F1> 177,500 3,594,375
President Riverboat Casinos<F1> 1,195,000 10,605,625
Promus Cos., Inc.<F1> 1,397,900 38,791,725
Radica Gaming<F1> 541,000 3,516,500
SFX Broadcasting, Inc.<F1> 7,500 114,375
Showboat, Inc. 160,000 1,960,000
Starsight Telecast, Inc.<F1> 15,700 168,775
Station Casinos, Inc.<F1> 125,000 1,406,250
WMS Industries, Inc.<F1> 4,000 69,500
--------------
$ 99,659,167
- -----------------------------------------------------------------------------
Financial Institutions - 0.6%
BHC Financial, Inc. 37,875 $ 345,609
Concord Holding Corp.<F1> 77,900 779,000
Factory Stores America, Inc. 142,700 2,943,187
First Merchants Acceptance Corp.<F1> 63,000 598,500
McArthur Glen Realty Corp. 15,000 210,000
PMC Commercial Trust 20,000 235,000
Servicios Financieros Quadram<F1> 131,800 1,812,250
TFC Enterprises<F1> 41,500 383,875
--------------
$ 7,307,421
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Insurance - 0.4%
RightCHOICE Managed Care, Inc.<F1> 15,000 $ 208,125
Sphere Drake Holdings Ltd. 405,000 4,556,250
--------------
$ 4,764,375
- -----------------------------------------------------------------------------
Machinery - 0.1%
Flair Corp. 25,000 $ 446,875
Miller Industries, Inc.<F1> 10,000 145,000
Veeco Instruments, Inc.<F1> 26,300 289,300
--------------
$ 881,175
- -----------------------------------------------------------------------------
Medical and Health Products - 1.4%
Boston Scientific Corp.<F1> 309,200 $ 4,947,200
Haemonetics Corp.<F1> 75,000 1,462,500
Health Management, Inc.<F1> 189,000 3,165,750
Healthdyne, Inc.<F1> 378,500 3,217,250
Orthofix International N.V.<F1> 290,000 3,190,000
Sofamor/Danek Group<F1> 2,400 38,700
Tokos Medical Corp.<F1> 200,000 1,350,000
--------------
$ 17,371,400
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 20.2%
Advantage Health Corp.<F1> 128,300 $ 3,784,850
Arbor Health Care Co.<F1> 7,500 148,125
CareLine, Inc.<F1><F4> 728,700 4,554,375
Clintrials Research<F1> 35,000 301,875
Columbia HCA Healthcare 449,999 17,043,712
Community Health Systems, Inc.<F1> 5,800 142,100
Continental Medical Systems, Inc.<F1> 95,100 677,587
Coram Healthcare<F1> 793,726 13,394,126
FHP International Corp.<F1> 124,600 3,364,200
FPA Medical Management, Inc.<F1> 75,000 937,500
Foundation Health Corp.<F1> 272,666 9,918,225
Genesis Health Ventures, Inc.<F1> 110,000 3,107,500
Gulf South Medical Supply<F1> 10,000 300,000
Healthsource, Inc.<F1> 179,000 6,421,625
Healthtrust, Inc. - The Hospital Company<F1> 152,300 4,911,675
Healthwise of America, Inc.<F1> 102,500 3,292,812
Health Care & Retirement Corp.<F1> 35,000 958,125
Horizon Healthcare Corp.<F1> 187,000 4,978,875
Integrated Health Services, Inc.<F1><F4> 934,300 35,503,400
Living Centers of America<F1> 85,000 2,741,250
Manor Care, Inc. 53,600 1,520,900
Mariner Health Group, Inc.<F1> 293,000 6,409,375
Mid-Atlantic Medical Services, Inc.<F1><F4> 2,370,000 54,806,250
Multicare Cos., Inc.<F1> 90,900 1,755,506
Option Care, Inc.<F1> 140,000 350,000
Pacific Physician Services<F1> 17,350 281,937
Pacificare Health Systems, Inc., "A"<F1> 9,800 656,600
Pacificare Health Systems, Inc., "B"<F1> 493,600 32,577,600
PerSeptive Biosystems<F1><F3><F5> 16,078 99,482
Physician Reliance Network, Inc.<F1> 50,000 793,750
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - continued
Physician Sales & Service, Inc.<F1> 29,000 $ 445,875
Quorum Health Group<F1> 66,100 1,206,325
Renal Treatment Centers, Inc.<F1> 296,714 6,230,994
Sierra Health Services, Inc.<F1> 27,700 851,775
Sun Health Group<F1> 92,160 2,027,520
Surgical Care Affiliates, Inc. 83,100 1,599,675
United Healthcare Corp. 440,200 20,909,500
Wellcare Management, Inc.<F1> 77,700 1,767,675
--------------
$ 250,772,676
- -----------------------------------------------------------------------------
Metals and Minerals - 0.1%
Castech Aluminum Group<F1> 69,400 $ 1,006,300
- -----------------------------------------------------------------------------
Pollution Control
Continental Waste Industries, Inc.<F1> 15,000 $ 142,500
- -----------------------------------------------------------------------------
Printing and Publishing - 0.2%
Consolidated Graphics, Inc.<F1> 95,000 $ 1,710,000
Educational Insights, Inc.<F1> 46,500 220,875
--------------
$ 1,930,875
- -----------------------------------------------------------------------------
Railroads
Railtex, Inc.<F1> 23,000 $ 425,500
- -----------------------------------------------------------------------------
Restaurants and Lodging - 14.2%
Amerihost Properties, Inc.<F1> 100,000 $ 387,500
Applebee's International, Inc.<F4> 1,864,200 27,963,000
Back Bay Restaurant Group, Inc.<F1><F4> 185,100 1,712,175
Bertucci's, Inc.<F1> 379,700 4,841,175
Brinker International, Inc.<F1> 540,000 9,180,000
Buffets, Inc.<F1> 1,350,100 12,319,662
Bugaboo Creek Steak House, Inc.<F1> 40,000 410,000
Cheesecake Factory<F1> 10,000 162,500
DF&R Restaurants, Inc.<F1> 210,000 2,966,250
Doubletree Corp.<F1> 24,500 459,375
Ground Round Restaurants, Inc.<F1> 241,000 1,687,000
Hammons (John Q) Hotels, Inc.<F1> 133,200 1,931,400
Hometown Buffet, Inc.<F1><F4> 823,000 8,024,250
Hospitality Franchise System<F1><F4> 2,430,000 59,535,000
IHOP Corp.<F1> 65,000 1,608,750
Innkeepers USA Trust<F1> 250,000 1,843,750
Lone Star Steakhouse and Saloon, Inc.<F1> 346,300 7,618,600
Nathan's Famous, Inc.<F1> 20,000 97,500
Quantum Restaurant Group, Inc.<F1><F4> 540,700 5,609,762
Sbarro, Inc. 20,000 447,500
ShoLodge, Inc.<F1> 285,600 6,568,800
Showbiz Pizza Time, Inc.<F1><F4> 750,000 5,718,750
Sonic Corp.<F1> 250,000 5,500,000
Supertel Hospitality, Inc.<F1> 90,000 1,057,500
Taco Cabana, Inc.<F1><F4> 968,295 8,230,507
--------------
$ 175,880,706
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Stores - 12.4%
A Pea In The Pod, Inc.<F1> 20,000 $ 55,000
American Studios, Inc. 147,200 570,400
Baby Superstores, Inc.<F1> 7,000 281,750
Central Tractor Farm & Country, Inc.<F1> 20,000 305,000
CompUSA, Inc.<F1> 185,000 2,543,750
Consolidated Stores Corp.<F1> 849,400 14,864,500
Corporate Express, Inc.<F1> 34,300 728,875
Duty Free International, Inc. 609,400 7,388,975
Finish Line, Inc.<F1> 72,300 560,325
Funco, Inc.<F1> 20,000 295,000
General Nutrition Cos., Inc.<F1> 134,500 3,934,125
Grow Biz International, Inc.<F1> 42,500 425,000
Hollywood Entertainment Corp.<F1> 79,250 2,635,062
Micro Warehouse, Inc.<F1> 1,149,000 37,414,312
Mothers Work, Inc.<F1><F4> 211,500 2,167,875
Movie Gallery, Inc.<F1> 212,500 5,551,562
National Vision Associates Ltd.<F1> 203,700 942,112
Natural Wonders, Inc.<F1> 28,600 132,275
Office Depot, Inc.<F1> 2,286,300 54,299,625
Officemax, Inc.<F1> 71,000 1,748,375
PetSmart, Inc.<F1> 34,400 1,023,400
Petstuff, Inc.<F1> 38,100 400,050
Phar-Mor, Inc.<F1><F3><F5> 178,350 479,761
Shoe Carnival, Inc.<F1> 492,900 2,464,500
Sportmart, Inc., "A"<F1> 96,000 1,116,000
Sports & Recreation, Inc.<F1> 62,050 1,411,637
Sports Authority, Inc.<F1> 34,200 778,050
Sports Club, Inc.<F1> 262,900 1,938,887
Strouds, Inc.<F1> 65,000 1,040,000
Sun Television and Appliances, Inc. 300,000 2,662,500
Sunglass Hut International, Inc.<F1> 40,000 1,730,000
Welcome Home, Inc.<F1> 88,900 477,837
West Marine, Inc.<F1> 33,000 660,000
--------------
$ 153,026,520
- -----------------------------------------------------------------------------
Telecommunications - 4.1%
American Paging, Inc.<F1> 47,500 $ 326,562
Bay Networks, Inc.<F1> 296,342 7,630,806
Call Net Enterprises, Inc., "B"<F1><F2> 125,000 612,967
Colonial Data Tech<F1> 121,100 1,195,862
Crosscomm Corp.<F1> 44,400 421,800
Davel Communications Group<F1> 30,000 390,000
IDB Communications Group, Inc.<F1> 2,600,000 21,450,000
Intellicall, Inc.<F1> 18,545 71,861
Newbridge Networks<F1> 72,600 2,441,175
Ortel Corp.<F1> 24,200 629,200
Paging Network, Inc.<F1> 22,000 693,000
Rogers Communications, Inc.<F1> 1,000,000 13,805,400
Tele-Matic Corp.<F1> 27,000 243,000
Tessco Technologies<F1> 13,400 217,750
Xpedite Systems, Inc.<F1> 46,400 748,200
--------------
$ 50,877,583
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks and Warrants - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Trucking - 0.7%
Celadon Group, Inc.<F1> 36,100 $ 631,750
MTL, Inc.<F1> 70,000 866,250
Transportation Corp. America, "B"<F1><F3><F4><F5> 692,516 6,855,908
Trism, Inc.<F1> 12,875 160,937
US Xpress Enterprises, Inc., "A"<F1> 34,200 397,594
--------------
$ 8,912,439
- -----------------------------------------------------------------------------
Venture Capital - 0.8%
Copley Partners 1<F1><F3><F4> 3,000,000 $ 1,015,176
Copley Partners 2<F1><F3><F4> 3,000,000 2,653,230
Highland Capital Partners<F1><F3><F4> 7,500,000 5,645,175
--------------
$ 9,313,581
- -----------------------------------------------------------------------------
Foreign
United Kingdom
Takare PLC (Medical & Health Technology
and Services)<F2> 35,000 $ 110,641
- -----------------------------------------------------------------------------
Total Common Stocks and Warrants
(Identified Cost, $869,320,096) $1,203,416,714
- -----------------------------------------------------------------------------
Convertible Bonds - 0.6%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Entertainment - 0.4%
Argosy Gaming Corp., 12s, 2001 $ 4,676 $ 4,582,480
Medical and Health Technology and Services - 0.1%
CareLine, Inc., 8s, 2001<F2><F4> 1,500 1,140,000
Restaurants and Lodging - 0.1%
ShoLodge, Inc., 7.5s, 2004 2,000 2,160,000
- -----------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $8,379,429) $ 7,882,480
- -----------------------------------------------------------------------------
Short-Term Obligations - 1.8%
- -----------------------------------------------------------------------------
Dow Chemical Co., due 12/01/94 $ 8,100 $ 8,100,000
Federal National Mortgage Assn.,
due 12/05/94 - 12/27/94 13,800 13,759,446
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 21,859,446
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $899,558,971) $1,233,158,640
Other Assets, Less Liabilities - 0.4% 5,304,513
- -----------------------------------------------------------------------------
Net Assets - 100.0% $1,238,463,153
- -----------------------------------------------------------------------------
<FN>
<F1> Non-income producing security.
<F2> SEC Rule 144A security.
<F3> Restricted security.
<F4> Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
<F5> Security valued by or at the direction of the Trustees.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1994
- ------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $717,883,268) $ 978,974,938
Affiliated issuers (identified cost, $171,675,703) 254,183,702
--------------
Total investments, at value (identified cost,
$899,558,971) $1,233,158,640
Cash 31,614
Receivable for investments sold 20,944,649
Receivable for Fund shares sold 2,558,298
Interest and dividends receivable 341,729
Other assets 35,358
--------------
Total assets $1,257,070,288
--------------
Liabilities:
Payable for investments purchased $ 11,260,330
Payable for Fund shares reacquired 6,327,111
Payable to affiliates -
Management fee 25,619
Shareholder servicing agent fee 6,306
Distribution fee 494,728
Accrued expenses and other liabilities 493,041
--------------
Total liabilities $ 18,607,135
--------------
Net assets $1,238,463,153
--------------
Net assets consist of:
Paid-in capital $ 885,687,939
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 333,597,784
Accumulated undistributed net realized gain on investments
and foreign currency transactions 19,221,140
Accumulated net investment loss (43,710)
--------------
Total $1,238,463,153
--------------
Shares of beneficial interest outstanding 66,480,001
--------------
Class A shares:
Net asset value and redemption price per share
(net assets of $469,826,223 / 25,089,804 shares of
beneficial interest outstanding) $18.73
------
Offering price per share (100/94.25) $19.87
------
Class B shares:
Net asset value, redemption price and offering price per share
(net assets of $768,636,930 / 41,390,197 shares of
beneficial interest outstanding) $18.57
------
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended November 30, 1994
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest (including $66,000 received from affiliated
issuers) $ 1,079,037
Dividends (including $244,596 received from affiliated
issuers) 1,693,394
------------
Total investment income $ 2,772,431
------------
Expenses -
Management fee $ 8,805,097
Trustees' compensation 44,108
Shareholder servicing agent fee (Class A) 654,593
Shareholder servicing agent fee (Class B) 1,528,259
Distribution and service fee (Class A) 1,522,184
Distribution and service fee (Class B) 7,376,364
Custodian fee 382,925
Postage 251,758
Printing 180,287
Legal fees 101,089
Auditing fees 60,907
Miscellaneous 1,075,430
------------
Total expenses $ 21,983,001
Reduction of expenses by distributor (435,336)
------------
Net expenses $ 21,547,665
------------
Net investment loss $(18,775,234)
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions (net of $459,246 loss from
transactions with affiliated issuers) $ 41,832,047
Foreign currency transactions (845,340)
------------
Net realized gain on investments $ 40,986,707
------------
Change in unrealized appreciation -
Investments $ 64,924,764
Translation of assets and liabilities in foreign currencies (1,885)
------------
Net unrealized gain on investments $ 64,922,879
------------
Net realized and unrealized gain on investments and
foreign currency $105,909,586
------------
Increase in net assets from operations $ 87,134,352
------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended November 30, 1994 1993
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment loss $ (18,775,234) $ (8,345,244)
Net realized gain on
investments and foreign
currency transactions 40,986,707 34,909,608
Net unrealized gain on
investments and foreign
currency 64,922,879 89,024,765
-------------- -------------
Increase in net assets from
operations $ 87,134,352 $ 115,589,129
-------------- -------------
Distributions declared to
shareholders -
From net realized gain on
investments and foreign
currency transactions (Class A) $ (11,484,710) $ --
From net realized gain on
investments and foreign
currency transactions (Class B) (17,957,239) (3,727,233)
-------------- -------------
Total distributions declared
to shareholders $ (29,441,949) $ (3,727,233)
-------------- -------------
Fund share (principal)
transactions -
Net proceeds from sale of
shares $ 933,615,981 $ 423,211,335
Net asset value of shares
issued in connection with
the acquisition of MFS
Emerging Growth Fund -- 341,038,225
Net asset value of shares
issued to shareholders
in reinvestment of
distributions 25,655,969 3,271,073
Cost of shares reacquired (750,977,096) (264,217,833)
-------------- -------------
Increase in net assets from
Fund share transactions $ 208,294,854 $ 503,302,800
-------------- -------------
Total increase in net
assets $ 265,987,257 $ 615,164,696
Net assets:
At beginning of year 972,475,896 357,311,200
-------------- -------------
At end of year $1,238,463,153 $ 972,475,896
-------------- -------------
Accumulated net investment
loss at end of year $ (43,710) $ (20,579)
-------------- -------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -continued
<TABLE>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, 1994 1993<F2> 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $17.68 $16.43 $17.64 $14.93 $12.07
------ ------ ------ ------ ------
Income from investment operations -
Net investment loss $(0.20)<F5> $(0.03) $(0.35)<F5> $(0.33) $(0.07)
Net realized and unrealized gain (loss) on investments 1.78<F5> 1.28 1.78<F5> 3.19 3.52
------ ------ ------ ------ ------
Total from investment operations $ 1.58 $ 1.25 $ 1.43 $ 2.86 $ 3.45
------ ------ ------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments $(0.53) -- $(0.50) $(0.15) $(0.59)
------ ------ ------ ------ ------
Net asset value - end of period $18.73 $17.68 $18.57 $17.64 $14.93
------ ------ ------ ------ ------
Total return<F4> 9.06% 38.98%<F3> 8.21% 19.36% 29.25%
Ratios (to average net assets)/Supplemental data:
Expenses 1.33%<F6> 1.19%<F3> 2.14% 2.19% 2.33%
Net investment loss (1.09)%<F6> (0.98)%<F3> (1.90)% (1.61)% (2.00)%
Portfolio turnover 39% 58% 39% 58% 59%
Net assets at end of period (000,000 omitted) $ 470 $ 371 $ 769 $ 602 $ 357
</TABLE>
<TABLE>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, 1991 1990 1989 1988 1987<F1>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 6.89 $ 7.69 $ 5.91 $ 4.97 $ 5.50
------ ------ ------ ------ ------
Income from investment operations -
Net investment loss $(0.13) $(0.14) $(0.13) $(0.11) $(0.06)
Net realized and unrealized gain (loss) on investments 5.31 (0.66) 1.91 1.05 (0.47)
------ ------ ------ ------ ------
Total from investment operations $ 5.18 $(0.80) $ 1.78 $ 0.94 $(0.53)
------ ------ ------ ------ ------
Net asset value - end of period $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97
------ ------ ------ ------ ------
Total return<F6> 75.18% (10.40)% 30.12% 18.91% (10.44)%
Ratios (to average net assets)/Supplemental data:
Expenses 2.50% 2.75% 2.81% 2.30% 2.40%<F3>
Net investment loss (1.98)% (1.86)% (1.91)% (1.65)% (1.50)%<F3>
Portfolio turnover 112% 86% 95% 57% 81%
Net assets at end of period (000,000 omitted) $ 145 $ 73 $ 82 $ 61 $ 50
<FN>
<F1>For the period from the commencement of investment operations, December 29,
1986 to November 30, 1987
<F2>For the period from the date of issue of Class A shares, September 13, 1993
to November 30, 1993.
<F3>Annualized.
<F4>Total returns for Class A shares do not include the sales charge. If the
charge had been included, the results would have been lower.
<F5>Per share data for the periods indicated is based on average shares
outstanding.
<F6>The distributor did not impose a portion of its Class A distribution fee for
the period indicated. If this fee had been incurred by the Fund, the ratios
of expenses to average net assets and net investment loss to average net
assets would have been 1.43% and 1.19%, respectively. The net investment
loss per share would have been $0.22.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization MFS Emerging Growth Fund (the Fund) is a
diversified series of MFS Series Trust II (the Trust). The Trust is organized as
a Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Short-term obligations, which
mature in 60 days or less, are valued at amortized cost, which approximates
value. Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rate movements on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction gains
and losses. The portion of both realized and unrealized gains and losses on
investments that results from fluctuations in foreign currency exchange rates is
not separately disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of stock index contracts at a fixed price on a future date. In
entering such contracts, the Fund is required to deposit either in cash or
securities an amount equal to a certain percentage of the contract amount.
Subsequent payments are made or received by the Fund each day, depending on the
daily fluctuations in the value of the underlying security, and are recorded for
financial statement purposes as unrealized gains or losses by the Fund. The
Fund's investment in stock index futures contracts is designed to hedge against
anticipated future changes in securities prices. The Fund may also invest in
stock index futures contracts for non-hedging purposes, subject to applicable
law. Should securities prices move unexpectedly, the Fund may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At November 30, 1994, the Fund had no securities on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counter parties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Dividend income is recorded on the ex-dividend date for dividends
received in cash. Dividend payments received in additional securities are
recorded on the ex-dividend date in an amount equal to the value of the security
on such date.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return, and consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex- dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended November 30, 1994, $18,752,103 and $8,486,487 were
reclassified to accumulated net investment loss and paid-in capital,
respectively, from accumulated undistributed net realized gain on investments
and foreign currency transactions due to differences between book and tax
accounting for short-term capital gains and net investment losses. This change
had no effect on the net assets or net asset value per share.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A and
Class B shares. The two classes of shares differ in their shareholder servicing
agent, and distribution and service fees. Shareholders of each class also bear
certain expenses that pertain only to that particular class. All shareholders
bear the common expenses of the Fund pro rata, based on the average daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses, including distribution and shareholder servicing fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee, computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets, amounted to $8,805,097.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Financial Services, Inc. (FSI)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all of its independent Trustees. Included in Trustees' compensation is
a net periodic pension expense of $14,758 for the year ended November 30, 1994.
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$231,114 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate Distribution Plans for Class A and
Class B shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to FSI of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to FSI wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. FSI is waiving the 0.10% distribution fees (amounting to
$435,336 for the year ended November 30, 1994) for an indefinite period. Fees
incurred under the Distribution Plan during the year ended November 30, 1994 net
of waiver were 0.25% of average daily net assets attributable to Class A shares
on an annualized basis and amounted to $1,086,848, (of which FSI retained
$192,412).
The Class B Distribution Plan provides that the Fund will pay FSI a monthly
distribution fee, equal to 0.75% per annum, and a quarterly service fee of up to
0.25% per annum, of the Fund's average daily net assets attributable to Class B.
FSI will pay to each securities dealer that enters into a sales agreement with
FSI all or a portion of the service fee attributable to Class B shares. The
service fee is intended to be additional consideration for services rendered by
the dealer with respect to Class B shares. Fees incurred under the Distribution
Plans during 1994 were 1.00% of average daily net assets attributable to Class B
shares on an annualized basis and amounted to $7,376,364 (of which FSI retained
$5,532,131).
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within twelve months following the share purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a share redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended November 30, 1994 were $923 and $1,027,718 for Class A
shares and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$654,593 and $1,528,259 for Class A and Class B shares, respectively, for its
services as shareholder servicing agent. The fee is calculated as a percentage
of the average daily net assets of each class of shares at an effective annual
rate of up to 0.15% and up to 0.22% attributable to Class A and Class B shares,
respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$600,049,751 and $453,718,735, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $899,863,359
------------
Gross unrealized appreciation $460,233,968
Gross unrealized depreciation (126,938,687)
------------
Net unrealized appreciation $333,295,281
------------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
Class A Shares
<CAPTION>
1994 1993<F1>
-------------------------- ---------------------------
Year Ended November 30, Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 26,143,949 $ 483,879,494 3,260,220 $ 56,874,786
Shares issued to shareholders in
reinvestment of distributions 584,374 10,565,806 -- --
Shares issued in connection
with the acquisition of
MFS Emerging Growth Fund -- -- 20,761,320 341,038,225
Shares reacquired 22,607,024) (420,205,407) (3,053,035) (53,163,957)
---------- ------------- ---------- ------------
Net increase 4,121,299 $ 74,239,893 20,968,505 $344,749,054
---------- ------------- ---------- ------------
Class B Shares
1994 1993
-------------------------- ---------------------------
Year Ended
November 30, Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------
Shares sold 24,347,440 $ 449,736,487 23,379,896 $366,336,549
Shares issued to shareholders in
reinvestment of distributions 835,529 15,090,163 221,360 3,271,073
Shares reacquired (17,900,602) (330,771,689) (13,428,146) (211,053,876)
----------- ------------- ---------- --------------
Net increase 7,282,367 $ 134,054,961 10,173,110 $ 158,553,746
----------- ------------- ---------- --------------
<FN>
<F1>For the period from commencement of offering of Class A shares, September
13, 1993 to November 30, 1993.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended November 30, 1994 was $14,104.
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended November
30, 1994 is set forth below:
<TABLE>
<CAPTION>
Acquisitions Dispositions Interest
Beginning ------------------------ ---------------------- Ending Realized and
Share/Par Share/Par Share/Par Share/Par Gain Dividend Ending
Affiliate Amount Amount Cost Amount Cost Amount (Loss) Income Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Applebee's
International, Inc. 907,400 956,800 $ 6,658,467 -- $ -- 1,864,200 $ -- $ 54,444 $ 27,963,000
Back Bay Restaurant
Group, Inc. 185,100 -- -- -- -- 185,100 -- -- 1,712,175
CareLine, Inc. -- 748,700 5,403,371 20,000 85,000 728,700 57,500 -- 4,554,375
CareLine, Inc.,
8s, 2001 -- 1,500,000 5,233,371 -- -- 1,500,000 -- 66,000 1,140,000
Hometown Buffet,
Inc. 71,600 751,400 12,027,075 -- -- 823,000 -- -- 8,024,250
Hospitality
Franchise System 1,210,000 1,220,000 250,600 -- -- 2,430,000 -- -- 59,535,000
Intergrated Health
Services, Inc. 692,500 259,700 7,799,356 17,900 402,145 934,300 208,610 -- 35,503,400
Marcam Corp. 651,800 -- -- 55,000 1,501,175 596,800 (913,675) -- 5,968,000
Mid Atlantic Medical
Services, Inc. 1,170,000 1,215,000 971,527 15,000 112,791 2,370,000 306,583 -- 54,806,250
Mothers Work, Inc. 216,500 -- -- 5,000 85,625 211,500 2,450 -- 2,167,875
National Gaming
Corp. -- 243,000 -- -- -- 243,000 -- -- 4,070,250
Quantum Restaurant
Group, Inc. 440,700 100,000 1,003,562 -- -- 540,700 -- -- 5,609,762
Showbiz Pizza Time,
Inc. 750,000 -- -- -- -- 750,000 -- 3,000 5,718,750
System Software
Assoc. 1,559,600 -- -- 20,000 194,643 1,539,600 (120,714) 187,152 22,324,200
Taco Cabana, Inc. 226,500 741,795 7,039,147 -- -- 968,295 -- -- 8,230,507
Transportation Corp.
of America, "B" 923,355 -- -- 230,839 -- 692,516 -- -- 6,855,908
----------- ---------- --------- -------- ------------
$41,153,105 $2,381,379 $(459,246) $310,596 $254,183,702
----------- ---------- --------- -------- ------------
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At November 30, 1994,
the Fund owned the following restricted securities (constituting 1.62% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
</TABLE>
<TABLE>
<CAPTION>
Date of
Description Acquisition Share/Par Amount Cost Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Boomtown Inc. 10/23/92 - 5/25/93 87,000 $1,054,000 $ 1,109,250
Call Net Enterprises, Inc., "B" 11/10/93 125,000 1,051,600 612,967
CareLine, Inc., 8s, 2001 9/27/94 1,500,000 5,233,371 1,140,000
Copley Partners 1 12/02/86 3,000,000 799,924 1,015,176
Copley Partners 2 12/02/86 - 8/09/91 3,000,000 2,289,864 2,653,230
Highland Capital Partners 6/28/88 - 6/28/93 7,500,000 2,334,979 5,645,175
PerSeptive BioSystems, Inc. 10/24/93 16,078 426,067 99,482
Phar Mor, Inc. 11/23/91 - 4/22/92 178,350 5,045,462 479,761
Takare PLC 4/08/92 - 7/09/92 35,000 100,873 110,641
Transportation Corp. of America, "B" 3/16/87 692,516 2,000,000 6,855,908
Turkiye Garanti Bankasi 10/29/93 160,000 593,800 400,000
-----------
$20,121,590
-----------
</TABLE>
(9) Acquisitions
At the close of business on September 10, 1993, the Fund acquired all of the
assets and liabilities of MFS Emerging Growth Fund (MEG). The acquisition was
accomplished by a tax-free exchange of 20,761,320 Class A shares of the Fund
(valued at $341,038,225) for the 16,492,795 shares of MEG. MEG's net assets on
that date ($341,038,225), including $87,662,825 of unrealized appreciation, were
combined with those of the Fund. The aggregate net assets of the Fund and MEG
immediately before the acquisition were $532,493,965 and $341,038,225,
respectively. The aggregate net assets of the Fund after the acquisition were
$873,532,190.
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust II and Shareholders of MFS Emerging Growth
Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Emerging Growth Fund (one of the series
constituting MFS Series Trust II) as of November 30, 1994, the related statement
of operations for the year then ended, the statements of changes in net assets
for the years ended November 30, 1994 and November 30, 1993, and the financial
highlights for each of the years in the eight-year period ended November 30,
1994. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
November 30, 1994 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Emerging Growth
Fund at November 30, 1994, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 3, 1995
<PAGE>
PROSPECTUS
April 1, 1995
Class A Shares
of Beneficial
MFS(R) CAPITAL Interest
GROWTH FUND Class B Shares
of Beneficial
(A member of the MFS Family of Funds(R)) Interest
- ------------------------------------------------------------------
- ----
Page
- ----
1. Expense Summary
........................................................ 2
2. The Fund
...............................................................
3
3. Condensed Financial Information
........................................ 4
4. Investment Objective and Policies
...................................... 4
5. Investment Techniques
.................................................. 8
6. Management of the Fund
................................................. 12
7. Information Concerning Shares of the Fund
.............................. 13
Purchases
........................................................... 13
Exchanges
........................................................... 18
Redemptions and Repurchases
......................................... 19
Distribution Plans
.................................................. 21
Distributions
....................................................... 22
Tax Status
.......................................................... 22
Net Asset Value
..................................................... 23
Description of Shares, Voting Rights and Liabilities
................ 23
Performance Information
............................................. 23
8. Shareholder Services
................................................... 24
Appendix A
............................................................. 26
Appendix B
............................................................. 29
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
MFS CAPITAL GROWTH FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-
5000
The investment objective of MFS Capital Growth Fund (the "Fund")
is to provide
growth of capital. The Fund is a diversified series of MFS Series
Trust II (the
"Trust"), an open-end management investment company. THE FUND
IS INTENDED FOR
INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT THE RISKS
ENTAILED IN SEEKING
LONG-TERM GROWTH OF CAPITAL (see "Investment Objective and
Policies"). The
minimum initial investment generally is $1,000 per account (see
"Purchases").
The Fund's investment adviser and distributor are
Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund
Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston
Street, Boston,
Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY.
This Prospectus sets forth concisely the information concerning
the Trust and
Fund that a prospective investor ought to know before investing.
The Trust, on
behalf of the Fund, has filed with the Securities and Exchange
Commission (the
"SEC") a Statement of Additional Information, dated April 1,
1995, which
contains more detailed information about the Trust and the
Fund and is
incorporated into this Prospectus by reference. See page 25
for a further
description of the information set forth in the Statement
of Additional
Information. A copy of the Statement of Additional Information
may be obtained
without charge by contacting the Shareholder Servicing Agent (see
back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
CLASS A CLASS B
- ------- -------
<S>
<C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a
percentage of offering price)
........................................ 5.75%
0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original
purchase price or redemption proceeds, as applicable)
................ See Below<F1> 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees
........................................................
0.75% 0.75%
Rule 12b-1 Fees (after applicable fee reduction)
....................... 0.00%<F2> 1.00%<F3>
Other Expenses
.........................................................
0.37% 0.43%
- ---- ----
Total Operating Expenses (after applicable fee reduction)
.............. 1.12% 2.18%
<FN>
- ----------
<F1> Purchases of $1 million or more are not subject to an initial
sales charge;
however, a contingent deferred sales charge ("CDSC") of 1%
will be imposed
on such purchases in the event of certain redemption
transactions within 12
months following such purchases (see "Purchases").
<F2> The Fund has adopted a Distribution Plan for its Class
A shares in
accordance with Rule 12b-1 under the Investment Company
Act of 1940, as
amended (the "1940 Act"), which provides that it will pay
distribution/
service fees aggregating up to (but not necessarily all of)
0.35% per annum
of the average daily net assets attributable to the Class A
shares. After a
substantial period of time, distribution expenses paid
under this Plan,
together with the initial sales charge, may total more
than the maximum
sales charge that would have been permissible if imposed
entirely as an
initial sales charge. Class A Rule 12b-1 fees will become
payable by the
Fund when the Fund's net assets attributable to Class A
shares first equal
or exceed $40,000,000, at which time the Fund's
distributor intends to
waive payment of 0.10% payable under the Class A
Distribution Plan (see
"Distribution Plans").
<F3> The Fund has adopted a Distribution Plan for its
Class B shares in
accordance with Rule 12b-1 under the 1940 Act, which
provides that it will
pay distribution/service fees aggregating up to 1.00% per
annum of the
average daily net assets attributable to the Class B
shares (see
"Distribution Plans"). After a substantial period of time,
distribution
expenses paid under this Plan, together with any CDSC, may
total more than
the maximum sales charge that would have been
permissible if imposed
entirely as an initial sales charge.
</TABLE>
EXAMPLE OF EXPENSES
---------------
An investor would pay the following dollar amounts of
expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b)
redemption at the
end of each of the time periods indicated (unless otherwise
noted):
PERIOD CLASS A
CLASS B
------ ------- --------------
- --------------
(1)
1 year ......................... $ 68 $ 62
$ 22
3 years ........................ 91 98
68
5 years ........................ 116 137
117
10 years ........................ 186 224(2)
224(2)
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately
eight years after
purchase; therefore, years nine and ten reflect Class A
expenses.
The purpose of the expense table above is to assist investors in
understanding
the various costs and expenses that a shareholder of the Fund will
bear directly
or indirectly. More complete descriptions of the following Fund
expenses are set
forth in the following sections: (i) varying sales charges on
share purchases --
"Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees --
"Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution
plan) fees --
"Distribution Plans".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE
GREATER OR LESS
THAN THOSE SHOWN.
<PAGE>
2. THE FUND
The Fund is a diversified series of the Trust, an open-end
management investment
company which was organized as a business trust under the
laws of The
Commonwealth of Massachusetts on July 30, 1986. The Trust
presently consists of
four series of shares, each of which represents a portfolio
with separate
investment policies. Shares of the Fund are continuously sold to
the public and
the Fund then uses the proceeds to buy securities for its
portfolio. Two classes
of shares of the Fund currently are offered to the general
public. Class A
shares are offered at net asset value plus an initial sales
charge (or a CDSC)
in the case of certain purchases of $1 million or more) and
subject to a
Distribution Plan, providing for a distribution fee and a
service fee. Class B
shares are offered at net asset value without an initial
sales charge but
subject to a CDSC and a Distribution Plan providing for a
distribution fee and a
service fee which are greater than the Class A distribution fee
and service fee.
Class B shares will convert to Class A shares approximately
eight years after
purchase.
The Trust's Board of Trustees provides broad supervision over the
affairs of the
Fund. MFS, a Delaware corporation, is the Fund's investment
adviser. The Adviser
is responsible for the management of the Fund's assets and the
officers of the
Trust are responsible for the Fund's operations. The Adviser
manages the
portfolio from day to day in accordance with the Fund's investment
objective and
policies. A majority of the Trustees are not affiliated with the
Adviser. The
selection of investments and the way they are managed depend on
the conditions
and trends in the economies of the various countries of the
world, their
financial markets and the relationship of their currencies to
the U.S. dollar.
The Fund also offers to buy back (redeem) its shares from its
shareholders at
any time at net asset value, less any applicable CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with
the financial
statements included in the Fund's Annual Report to
shareholders which are
incorporated by reference into the Statement of Additional
Information in
reliance upon the report of Deloitte & Touche LLP, independent
certified public
accountants, as experts in accounting and auditing.
<TABLE>
FINANCIAL
HIGHLIGHTS
Class A and Class B
shares
- ------------------------------------------------------------------
- -----------------------------------------------------------------
<CAPTION>
YEAR ENDED NOVEMBER 30, 1994 1993<F1> 1994 1993
1992 1991 1990 1989 1988 1987<F2>
- ------------------------------------------------------------------
- -----------------------------------------------------------------
CLASS A CLASS B
- ------------------------------------------------------------------
- -----------------------------------------------------------------
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
<S> <C> <C> <C> <C>
<C> <C> <C> <C> <C> <C>
beginning of period ..... $14.75 $14.58 $14.72 $14.83
$13.27 $11.29 $12.05 $ 9.38 $ 7.59 $ 7.50
------ ------ ------ ------
- ------ ------ ------ ------ ------ ------
Income from investment
operations --<F4>
Net investment income ... $ 0.21 $ 0.03 $ 0.04 $ 0.03
$ 0.02 $ 0.10 $ 0.18 $ 0.17 $ 0.12 $ 0.04
Net realized and
unrealized gain (loss)
on investments ......... (0.25) 0.14 (0.23) 0.50
2.61 2.15 (0.75) 2.63 1.76 0.06
------ ------ ------ ------
- ------ ------ ------ ------ ------ ------
Total from investment
operations ........... $(0.04) $ 0.17 $(0.19) $ 0.53
$ 2.63 $ 2.25 $(0.57) $ 2.80 $ 1.88 $ 0.10
------ ------ ------ ------
- ------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders --
From net investment
income ................. $(0.06) $ -- $ 0.00<F6> $(0.02)
$ -- $(0.14) $(0.19) $(0.13) $(0.09) $(0.01)
From net realized gain on
investments ............ (1.16) -- (1.16) (0.62)
(1.07) (0.13) -- -- -- --
------ ------ ------ ------
- ------ ------ ------ ------ ------ ------
Total distributions
declared to
shareholders .......... $(1.22) $ -- $(1.16) $(0.64)
$(1.07) $(0.27) $(0.19) $(0.13) $(0.09) $(0.01)
------ ------ ------ ------
- ------ ------ ------ ------ ------ -----
Net asset value -- end of
period ................. $13.49 $14.75 $13.37 $14.72
$14.83 $13.27 $11.29 $12.05 $ 9.38 $ 7.59
====== ====== ====== ======
====== ====== ====== ====== ====== ======
Total return<F5> ......... (0.47)% 5.01%<F3>(1.52)% 3.70%
20.61% 20.22% (4.80)% 30.11% 24.79% 1.41%<F3>
RATIOS (TO AVERAGE NET
ASSETS)/
SUPPLEMENTAL DATA:
Expenses ................ 1.12% 0.91%<F3> 2.18% 2.15%
2.24% 2.28% 2.38% 2.46% 2.17% 2.26%<F3>
Net investment income ... 1.59% 1.67%<F3> 0.32% 0.10%
0.18% 0.75% 1.56% 1.56% 1.34% 0.36%<F3>
PORTFOLIO TURNOVER ....... 50% 70% 50% 70%
65% 86% 68% 58% 93 139%
NET ASSETS AT END OF
PERIOD (000 OMITTED) .... $2,608 $ 196 $384,504 $454,089
$436,561 $317,375 $226,245 $202,861 $130,961 $88,471
<FN>
- ----------
<F1> For the period from the commencement of offering of
Class A shares,
September 7, 1993 to November 30, 1993.
<F2> For the period from commencement of investment operations,
December 29,
1986, to November 30, 1987.
<F3> Annualized.
<F4> Per share data for the periods subsequent to November 30,
1992 are based on
average shares outstanding.
<F5> 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.
<F6> The per share distribution from net investment income on
Class B shares was
$0.00312 per share.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide growth of capital. Dividend income,
if any, is a
consideration incidental to the Fund's objective of growth of
capital.
In seeking to achieve its investment objective, the Fund
maintains a flexible
approach toward types of companies as well as types of
securities, depending
upon the economic environment and the relative attractiveness
of the various
securities markets. Generally, emphasis is placed upon
companies believed to
possess above-average growth opportunities rather than on
companies with more
mature growth trends. However, mature companies are included
when, in the
judgment of the Adviser, the relative evaluation of such
companies appears to
provide opportunities for appreciation, or when mature companies
are expected to
undergo an acceleration in growth of earnings because of special
factors such as
new management, new products, changes in consumer demand, or
basic changes in
the economic environment.
While the policy of the Fund is to invest primarily in common
stocks, it may
seek appreciation in other types of securities such as fixed
income securities
(which may be unrated), convertible bonds, convertible
preferred stocks and
warrants when relative values make such purchases appear
attractive either as
individual issues or as types of securities in certain economic
environments. It
is contemplated that the Fund's non-convertible long-term debt
investments will
consist primarily of "investment grade" securities (rated
at least Baa by
Moody's Investors Service Inc. ("Moody's") or BBB by Standard &
Poor's Ratings
Group ("S&P") or Fitch Investors Service, Inc. ("Fitch"))
and that the
convertible debt investments will consist primarily of securities
rated at least
Ba by Moody's or BB by S&P or Fitch. Securities rated BBB by S&P
or Fitch or Baa
by Moody's are considered to have speculative characteristics.
Securities rated
BB by S&P or Fitch or Ba by Moody's are considered speculative
and are commonly
known as "junk bonds." (See "Additional Information as to
Investment Objective
and Policies -- Risk Factors Regarding Lower Rated
Securities" below for a
further description of the risks associated with investing in
these securities.)
For a description of these ratings, see Appendix A to this
Prospectus.
The Fund may also invest up to 25% (and expects generally to
invest between 1%
to 15%) of its total assets in foreign securities (not
including American
Depositary Receipts ("ADRs")), which are not traded on U.S.
exchanges. The Fund
may also enter into forward foreign currency exchange contracts
for the purchase
or sale of foreign currency for hedging and non-hedging
purposes, including
transactions entered into for the purpose of profiting from
anticipated changes
in foreign currency rates, as well as options on foreign
currencies (see
"Investment Techniques -- Forward Contracts on Foreign Currency"
and "-- Options
on Foreign Currencies" below). The Fund may also hold foreign
currency (see
"Additional Risk Factors" below).
The Fund may invest in ADRs which are certificates issued by a
U.S. depository
(usually a bank) and represent a specified quantity of shares of
an underlying
non-U.S. stock on deposit with a custodian bank as collateral.
Because ADRs
trade on United States securities exchanges, the Adviser does not
treat them as
foreign securities. However, they are subject to many of the
risks of foreign
securities such as exchange rates and more limited information
about foreign
issuers (see "Additional Risk Factors" below).
The Fund may invest in corporate asset-backed securities
(see "Investment
Techniques -- Corporate Asset-Backed Securities" below). The
Fund may write
covered call and put options and purchase call and put options on
securities and
stock indices in an effort to increase current income and for
hedging purposes
(see "Investment Techniques -- Options" below). The Fund may
also purchase and
sell stock index futures contracts and may write and purchase
options thereon
for hedging purposes and for non-hedging purposes, subject to
applicable law
(see "Investment Techniques -- Futures Contracts and
Options on Futures
Contracts" below). In addition, the Fund may purchase portfolio
securities on a
"when-issued" or on a "forward delivery" basis (see "Investment
Techniques --
When-Issued Securities" below). The Fund may also invest a portion
of its assets
in "loan participations" (see "Investment Techniques -- Loan
Participations"
below).
There is no formula as to the percentage of assets that may be
invested in any
one type of security. Cash, short-term obligations, repurchase
agreements or
other forms of debt securities are held to provide a
reserve for future
purchases of common stock or other securities. Subject to tax
requirements,
portfolio changes are made without regard to the length of time
a security has
been held, or whether a sale would result in a profit or loss.
ADDITIONAL INFORMATION AS TO INVESTMENT OBJECTIVE AND POLICIES
FIXED INCOME SECURITIES -- When and if available, the Fund may
purchase fixed
income securities at a discount from face value. However, the
Fund does not
intend to hold such securities to maturity for the purpose
of achieving
potential capital gains, unless current yields on these
securities remain
attractive.
RISK FACTORS REGARDING LOWER RATED SECURITIES -- The Fund
may invest to a
limited extent in lower-rated fixed income securities or
comparable unrated
securities. Investments in lower-rated fixed income securities,
while generally
providing greater income and opportunity for gain than
investments in higher
rated securities, usually entail greater risk of principal and
income (including
the possibility of default or bankruptcy of the issuers of such
securities), and
involve greater volatility of price (especially during
periods of economic
uncertainty or change) than investments in higher rated
securities and because
yields may vary over time, no specified level of income can ever
be assured. In
particular, securities rated lower than Baa by Moody's or BBB by
S&P or Fitch or
comparable unrated securities (commonly known as "junk bonds")
are considered
speculative. These lower rated high yielding fixed income
securities generally
tend to reflect economic changes (and the outlook for
economic growth),
short-term corporate and industry developments and the market's
perception of
their credit quality (especially during times of adverse
publicity) to a greater
extent than higher rated securities which react primarily to
fluctuations in the
general level of interest rates (although these lower rated
fixed income
securities are also affected by changes in interest rates).
In the past,
economic downturns or an increase in interest rates have
under certain
circumstances caused a higher incidence of default by the
issuers of these
securities and may do so in the future, especially in the
case of highly
leveraged issuers. During certain periods, the higher yields on
the Fund's lower
rated high yielding fixed income securities are paid primarily
because of the
increased risk of loss of principal and income, arising from such
factors as the
heightened possibility of default or bankruptcy of the
issuers of such
securities. Due to the fixed income payments of these securities,
the Fund may
continue to earn the same level of interest income while its
net asset value
declines due to portfolio losses, which could result in an
increase in the
Fund's yield despite the actual loss of principal. The
prices for these
securities may be affected by legislative and regulatory
developments. For
example, federal rules require that savings and loan
associations gradually
reduce their holdings of high-yield securities. An effect of
such legislation
may be to depress the prices of outstanding lower rated high
yielding fixed
income securities. Changes in the value of securities
subsequent to their
acquisition will not affect cash income or yield to maturity
to the Fund but
will be reflected in the net asset value of shares of the Fund.
The market for
these lower rated fixed income securities may be less liquid than
the market for
investment grade fixed income securities. Furthermore, the
liquidity of these
lower rated securities may be affected by the market's
perception of their
credit quality. Therefore, the Adviser's judgment may at times
play a greater
role in valuing these securities than in the case of
investment grade fixed
income securities, and it also may be more difficult during
times of certain
adverse market conditions to sell these lower rated securities
at their fair
value to meet redemption requests or to respond to changes in
the market. No
minimum rating standard is required by the Fund, although it is
contemplated
that the Fund's non-convertible long-term debt investments
will consist
primarily of "investment grade" securities (rated at least Baa by
Moody's or BBB
by S&P or Fitch) (see "Investment Objective and Policies" above).
To the extent
the Fund invests in these lower rated fixed income securities,
the achievement
of its investment objective may be more dependent on the
Adviser's own credit
analysis than in the case of a fund investing in higher quality
bonds. While the
Adviser may refer to ratings issued by established credit rating
agencies, it is
not a policy of the Fund to rely exclusively on ratings
issued by these
agencies, but rather to supplement such ratings with the
Adviser's own
independent and ongoing review of credit quality.
The Fund may also invest in fixed income securities rated Baa by
Moody's or BBB
by S&P or Fitch and comparable unrated securities. These
securities, while
normally exhibiting adequate protection parameters, may
have speculative
characteristics and changes in economic conditions and other
circumstances are
more likely to lead to a weakened capacity to make principal
and interest
payments than in the case of higher grade fixed income securities.
ADDITIONAL RISK FACTORS -- The net asset value of the shares
of an open-end
investment company which may invest to a limited extent in
fixed income
securities changes as the general levels of interest rates
fluctuate. When
interest rates decline, the value of a fixed income portfolio can
be expected to
rise. Conversely, when interest rates rise, the value of a
fixed income
portfolio can be expected to decline.
Although changes in the value of securities subsequent to their
acquisition are
reflected in the net asset value of shares of the Fund, such
changes will not
affect the income received by the Fund from such securities.
However, the
dividends paid by the Fund, if any, will increase or decrease in
relation to the
income received by the Fund from its investments, which would
in any case be
reduced by the Fund's expenses before it is distributed to
shareholders.
In addition, the use of options, futures contracts,
options on futures
contracts, forward contracts and options on foreign currencies
(see "Investment
Techniques" below) may result in the loss of principal,
particularly where such
instruments are traded for other than hedging purposes (e.g., to
enhance current
yield).
Investing in foreign securities or on foreign exchanges may
present a greater
degree of risk than investing in domestic issuers. These risks
include changes
in currency rates, exchange control regulations, governmental
administration,
economic or monetary policy (in this country or abroad), war or
expropriation.
In particular, the dollar value of portfolio securities of
non-U.S. issuers
fluctuates with changes in market and economic conditions
abroad and with
changes in relative currency values (when the value of the dollar
increases as
compared to a foreign currency, the dollar value of a
foreign-denominated
security decreases, and vice versa). Costs may be incurred in
connection with
conversions between various currencies. Special considerations
may also include
more limited information about foreign issuers, higher
brokerage costs,
different accounting standards and thinner trading markets.
Foreign securities
markets may also be less liquid, more volatile and less subject
to government
supervision than in the United States. Investments in foreign
countries could be
affected by other factors including confiscatory taxation
and potential
difficulties in enforcing contractual obligations and could
be subject to
extended settlement periods. Therefore, an investment in shares
of the Fund may
be subject to a greater degree of risk than investments in
other investment
companies which invest exclusively in domestic securities.
As a result of its investments in foreign securities, the
Fund may receive
interest or dividend payments, or the proceeds of the sale or
redemption of such
securities, in the foreign currencies in which such securities
are denominated.
In that event, the Fund may promptly convert such currencies into
dollars at the
then current exchange rate. Under certain circumstances, however,
such as where
the Adviser believes that the applicable exchange rate is
unfavorable at the
time the currencies are received or the Adviser anticipates,
for any other
reason, that the exchange rate will improve, the Fund may hold
such currencies
for an indefinite period of time.
In addition, the Fund may be required to receive delivery
of the foreign
currency underlying forward foreign currency contracts it has
entered into. This
could occur, for example, if an option written by the Fund is
exercised or the
Fund is unable to close out a Forward Contract. The Fund may
hold foreign
currency in anticipation of purchasing foreign securities. The
Fund may also
elect to take delivery of the currencies underlying options or
Forward Contracts
if, in the judgment of the Adviser, it is in the best interest of
the Fund to do
so. In such instances as well, the Fund may promptly convert
the foreign
currencies to dollars at the then current exchange rate, or
may hold such
currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take
advantage of
favorable movements in the applicable exchange rate, it also
exposes the Fund to
risk of loss if such rates move in a direction adverse to the
Fund's position.
Such losses could reduce any profits or increase any losses
sustained by the
Fund from the sale or redemption of securities, and could
reduce the dollar
value of interest of securities, and could reduce the dollar
value of interest
or dividend payments received. In addition, the holding of
currencies could
adversely affect the Fund's profit or loss on currency
options or Forward
Contracts, as well as its hedging strategies.
See the Statement of Additional Information for further
discussion of foreign
securities and the holding of foreign currency as well as the
associated risks.
Given the above average investment risk inherent in the Fund,
investment in
shares of the Fund should not be considered a complete
investment program and
may not be appropriate for all investors.
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES -- During
periods of unusual
market conditions when the Adviser believes that investing
for defensive
purposes is appropriate, or in order to meet anticipated
redemption requests, a
large portion or all of the assets of the Fund may be invested
in cash or cash
equivalents including, but not limited to, obligations of banks
with assets of
$1 billion or more (including certificates of deposit, bankers'
acceptances and
repurchase agreements), commercial paper, short-term notes,
U.S. Government
securities and related repurchase agreements. U.S. Government
securities also
include interests in trusts or other entities representing
interests in
obligations that are issued or guaranteed by the U.S. Government,
its agencies,
authorities or instrumentalities. See Appendix B to this
Prospectus for a
description of U.S. Government obligations and certain short-term
investments.
5. INVESTMENT TECHNIQUES
LENDING OF SECURITIES -- The Fund may make loans of its
portfolio securities.
Such loans will usually be made only to member banks of the
Federal Reserve
System and member firms (and subsidiaries thereof) of the
New York Stock
Exchange (the "Exchange") and would be required to be secured
continuously by
collateral in cash, cash equivalents or U.S. Government securities
maintained on
a current basis at an amount at least equal to the market
value of the
securities loaned. The Fund would continue to collect the
equivalent of the
interest on the securities loaned and would also receive
either interest
(through investment of cash collateral) or a fee (if the
collateral is U.S.
Government securities).
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase
agreements in order
to earn additional income on available cash or as a temporary
defensive measure.
Under a repurchase agreement, the Fund acquires securities
subject to the
seller's agreement to repurchase at a specified time and price.
If the seller
becomes subject to a proceeding under the bankruptcy laws or
its assets are
otherwise subject to a stay order, the Fund's right to liquidate
the securities
may be restricted (during which time the value of the securities
could decline).
As discussed in the Statement of Additional Information, the
Fund has adopted
certain procedures which are intended to minimize any such risk.
RESTRICTED SECURITIES -- The Fund may also purchase securities
that are not
registered under the Securities Act of 1933, as amended (the
"1933 Act")
("restricted securities"), including those that can be
offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933
Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based
upon a continuing
review of the trading markets for the specific 144A security,
whether such
security is illiquid and thus subject to the Fund's limitation on
investing not
more than 15% of its net assets in illiquid investments, or
liquid and thus not
subject to such limitation. The Board of Trustees has adopted
guidelines and
delegated to the Adviser the daily function of determining
and monitoring
liquidity of Rule 144A securities. The Board, however, will
retain sufficient
oversight and is ultimately responsible for the determinations.
The Board will
carefully monitor the Fund's investments in Rule 144A
securities, focusing on
such important factors, among others, as valuation, liquidity
and availability
of information. This investment practice could have the effect of
increasing the
level of illiquidity in the Fund to the extent that qualified
institutional
buyers become for a time uninterested in purchasing these
144A securities.
Subject to the Fund's 15% limitation on investments in illiquid
investments, the
Fund may also invest in restricted securities that may not be
sold under Rule
144A, which presents certain risks. As a result, the Fund might
not be able to
sell these securities when the Adviser wishes to do so, or
might have to sell
them at less than fair value. In addition, market quotations
are less readily
available. Therefore, the judgment of the Adviser may at times
play a greater
role in valuing these securities than in the case of unrestricted
securities.
WHEN-ISSUED SECURITIES -- In order to help ensure the
availability of suitable
securities for its portfolio, the Fund may purchase
securities on a "when-
issued" or on a "forward delivery" basis, which means that the
obligations will
be delivered to the Fund at a future date usually beyond
customary settlement
time. It is expected that, under normal circumstances, the
Fund will take
delivery of such securities. In general, the Fund does
not pay for the
securities until received and does not start earning interest on
the obligations
until the contractual settlement date. While awaiting
delivery of the
obligations purchased on such bases, the Fund will establish
a segregated
account consisting of cash, short-term money market instruments
or high quality
debt securities equal to the amount of the commitments to purchase
"when-issued"
securities. See the Statement of Additional Information.
CORPORATE ASSET-BACKED SECURITIES -- The Fund may invest in
corporate asset-
backed securities. These securities, issued by trusts and
special purpose
corporations, are backed by a pool of assets, such as credit card
or automobile
loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For
instance, in the
case of credit card receivables, these securities may not have
the benefit of
any security interest in the related collateral. See the Statement
of Additional
Information for further information on these securities.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS -- The Fund
may invest a
portion of its assets in "loan participations" and other direct
indebtedness. By
purchasing a loan participation, the Fund acquires some or all
of the interest
of a bank or other lending institution in a loan to a corporate
borrower. Many
such loans are secured, and most impose restrictive covenants
which must be met
by the borrower. These loans are made generally to finance
internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and
other corporate
activities. Such loans may be in default at the time of purchase.
The Fund may
also purchase other direct indebtedness such as trade or other
claims against
companies, which generally represent money owed by the company to
a supplier of
goods and services. These claims may also be purchased at a
time when the
company is in default. Certain of the loan participations and
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.
The highly leveraged nature of many such loans and other direct
indebtedness may
make such loans especially vulnerable to adverse changes in
economic or market
conditions. Loan participations and other direct indebtedness may
not be in the
form of securities or may be subject to restrictions on
transfer, and only
limited opportunities may exist to resell such instruments. As
a result, the
Fund may be unable to sell such investments at an opportune time
or may have to
resell them at less than fair market value. For a further
discussion of loan
participations, other direct indebtedness and the risks related
to transactions
therein, see the Statement of Additional Information.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS -- The
Fund may enter
into transactions in options, futures and forward contracts
on a variety of
instruments and indices, in order to protect against declines
in the value of
portfolio securities or increases in the cost of securities or
other assets to
be acquired and, subject to applicable law, to increase the Fund's
gross income.
The types of instruments to be purchased and sold by the Fund
are described in
the Statement of Additional Information, which should be read
in conjunction
with the following section. In addition, the Statement of
Additional Information
contains a further discussion of the nature of the transactions
which may be
entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call
and put options
and purchase call and put options on securities. The Fund will
write options on
securities for the purpose of increasing its return on such
securities and/or to
protect the value of its portfolio. In particular, where the
Fund writes an
option which expires unexercised or is closed out by the Fund at
a profit, it
will retain the premium paid for the option which will increase
its gross income
and will offset in part the reduced value of the portfolio
security underlying
the option, or the increased cost of portfolio securities to be
acquired. In
contrast, however, if the price of the underlying security
moves adversely to
the Fund's position, the option may be exercised and the Fund
will be required
to purchase or sell the underlying security at a disadvantageous
price, which
may only be partially offset by the amount of the premium. The
Fund may also
write combinations of put and call options on the same
security, known as
"straddles." Such transactions can generate additional premium
income but also
present increased risk.
By writing a call option on a security, the Fund limits its
opportunity to
profit from any increase in the market value of the underlying
security, since
the holder will usually exercise the call option when the
market value of the
underlying security exceeds the exercise price of the call.
However, the Fund
retains the risk of depreciation in value of securities on which
it has written
call options.
The Fund may also purchase put or call options in
anticipation of market
fluctuations which may adversely affect the value of its portfolio
or the prices
of securities that the Fund wants to purchase at a later date. In
the event that
the expected market fluctuations occur, the Fund may be able
to offset the
resulting adverse effect on its portfolio, in whole or in
part, through the
options purchased. The premium paid for a put or call
option plus any
transaction costs will reduce the benefit, if any, realized by
the Fund upon
exercise or liquidation of the option, and, unless the price of
the underlying
security changes sufficiently, the option may expire without value
to the Fund.
In certain instances, the Fund may enter into options on
Treasury securities
which may be referred to as "reset" options or "adjustable
strike" options.
These options provide for periodic adjustment of the strike
price and may also
provide for the periodic adjustment of the premium during
the term of the
option.
OPTIONS ON STOCK INDICES -- The Fund may write (sell) covered
call and put
options and purchase call and put options on stock indices. The
Fund may write
options on stock indices for the purpose of increasing its gross
income and to
protect its portfolio against declines in the value of
securities it owns or
increases in the value of securities to be acquired. When the
Fund writes an
option on a stock index, and the value of the index moves
adversely to the
holder's position, the option will not be exercised, and the
Fund will either
close out the option at a profit or allow it to expire
unexercised. The Fund
will thereby retain the amount of the premium, less related
transaction costs,
which will increase its gross income and offset part of the
reduced value of
portfolio securities or the increased cost of securities to be
acquired. Such
transactions, however, will constitute only partial hedges against
adverse price
fluctuations, since any such fluctuations will be offset only to
the extent of
the premium received by the Fund for the writing of the option,
less related
transaction costs. In addition, if the value of an underlying
index moves
adversely to the Fund's option position, the option may be
exercised, and the
Fund will experience a loss which may only be partially offset by
the amount of
the premium received.
The Fund may also purchase put or call options on stock
indices in order,
respectively, to hedge its investments against a decline in value
or to attempt
to reduce the risk of missing a market or industry segment
advance. The Fund's
possible loss in either case will be limited to the premium paid
for the option,
plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- The Fund may enter into stock index
futures contracts.
(Unless otherwise specified, futures contracts on indices are
referred to as
"Futures Contracts.") The Fund will utilize Futures Contracts
for hedging and
non-hedging purposes, subject to applicable law. Purchases or
sales of stock
index futures contracts for hedging purposes are used to attempt
to protect the
Fund's current or intended stock investments from broad
fluctuations in stock
prices. In the event that an anticipated decrease in the value
of portfolio
securities occurs as a result of a general stock market
decline, the adverse
effects of such changes may be offset, in whole or part, by gains
on the sale of
Futures Contracts. Conversely, the increased cost of portfolio
securities to be
acquired, caused by a general rise in the stock market, may be
offset, in whole
or part, by gains on Futures Contracts purchased by the Fund.
The Fund will
incur brokerage fees when it purchases and sells Futures
Contracts, and it will
be required to make and maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS -- The Fund may purchase and write
options on stock
index futures contracts. (Unless otherwise specified, options
on stock index
futures contracts are referred to as "Options on Futures
Contracts.") Such
investment strategies will be used for hedging and non-hedging
purposes, subject
to applicable law. Put and call Options on Futures Contracts
may be traded by
the Fund in order to protect against declines in the values
of portfolio
securities or against increases in the cost of securities to
be acquired.
Purchases of Options on Futures Contracts may present less risk
in hedging the
portfolios of the Fund than the purchase or sale of the
underlying Futures
Contracts since the potential loss is limited to the amount of
the premium plus
related transaction costs. The writing of such options,
however, does not
present less risk than the trading of Futures Contracts and will
constitute only
a partial hedge, up to the amount of the premium received. In
addition, if an
option is exercised, the Fund may suffer a loss on the
transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY -- The Fund may enter into
contracts for
the purchase or sale of a specific currency at a future date at
a price set at
the time of the contract (a "Forward Contract"). The Fund
will enter into
Forward Contracts for hedging and non-hedging purposes, including
transactions
entered into for the purpose of profiting from anticipated
changes in foreign
currency exchange rates. Transactions in Forward Contracts
entered into for
hedging purposes may include forward purchases or sales of
foreign currencies
for the purpose of protecting the dollar value of securities
denominated in a
foreign currency or protecting the dollar equivalent of interest
or dividends to
be paid on such securities. The Fund may also enter into Forward
Contracts for
"cross hedging" purposes (e.g., the purchase or sale of a
Forward Contract on
one type of currency as a hedge against adverse fluctuations in
the value of a
second type of currency). By entering into such transactions,
however, the Fund
may be required to forego the benefits of advantageous
changes in exchange
rates. The Fund may also enter into transactions in Forward
Contracts for other
than hedging purposes. For example, if the Adviser believes that
the value of a
particular foreign currency will increase or decrease relative
to the value of
the U.S. dollar, the Fund may purchase or sell such currency,
respectively,
through a Forward Contract. If the expected changes in the value
of the currency
occur, the Fund will realize profits which will increase its gross
income. Such
transactions, however, may be considered speculative and
could involve
significant risk of loss, as set forth below. The Fund
has established
procedures consistent with statements of the SEC and its staff
regarding the use
of Forward Contracts by registered investment companies, which
requires use of
segregated assets or "cover" in connection with the purchase
and sale of such
Contracts.
Forward Contracts are traded over-the-counter, and not on
organized commodities
or securities exchanges. As a result, such contracts
operate in a manner
distinct from exchange-traded instruments, and their use involves
certain risks
beyond those associated with transactions in the Futures and
Options contracts
described above.
OPTIONS ON FOREIGN CURRENCIES -- The Fund may purchase and
write put and call
options on foreign currencies for the purpose of protecting
against declines in
the dollar value of portfolio securities, and against increases
in the dollar
cost of securities to be acquired. As in the case of other
types of options,
however, the writing of an option on foreign currency will
constitute only a
partial hedge, up to the amount of the premium received, and the
Fund could be
required to purchase or sell foreign currencies at
disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on
foreign currency
may constitute an effective hedge against fluctuations in
exchange rates
although, in the event of rate movements adverse to the Fund's
position, it may
forfeit the entire amount of the premium plus related transaction
costs. As in
the case of Forward Contracts, certain options on foreign
currencies are traded
over-the-counter and involve risks which may not be present
in the case of
exchange-traded instruments.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD
CONTRACTS --
Although the Fund will enter into certain transactions in Futures
Contracts,
Options on Futures Contracts, Forward Contracts and options
for hedging
purposes, such transactions do involve certain risks. For
example, a lack of
correlation between the index or instrument underlying an
option, Futures
Contract or Forward Contract and the assets being hedged, or
unexpected adverse
price movements, could render the Fund's hedging strategy
unsuccessful and could
result in losses. "Cross hedging" transactions may involve
greater correlation
risks. In addition, there can be no assurance that a liquid
secondary market
will exist for any contract purchased or sold, and the Fund may
be required to
maintain a position until exercise or expiration, which could
result in losses.
As noted, the Fund may also enter into transactions in such
instruments (except
for options on foreign currencies) for other than hedging
purposes (subject to
applicable law), including speculative transactions, which involve
greater risk.
In entering into such transactions, the Fund may experience losses
which are not
offset by gains on other portfolio positions, thereby reducing its
gross income.
In addition, the markets for such instruments may be extremely
volatile from
time to time, as discussed in the Statement of Additional
Information, which
could increase the risks incurred by the Fund in
entering into such
transactions.
Transactions in options may be entered into on U.S. exchanges
regulated by the
SEC, in the over-the-counter market and on foreign exchanges,
while Forward
Contracts may be entered into only in the over-the-counter
market. Futures
Contracts and Options on Futures Contracts may be entered into on
U.S. exchanges
regulated by the Commodity Futures Trading Commission (the
"CFTC") and on
foreign exchanges. The securities underlying options and
Futures Contracts
traded by the Fund may include domestic as well as foreign
securities. Investors
should recognize that transactions involving foreign
securities or foreign
currencies, and transactions entered into in foreign
countries, may involve
considerations and risks not typically associated with
investing in U.S.
markets.
Transactions in options, Futures Contracts, Options on Futures
Contracts and
Forward Contracts entered into for non-hedging purposes involve
greater risk and
could result in losses which are not offset by gains on other
portfolio assets.
For example, the Fund may sell Futures Contracts on an index of
securities in
order to profit from any anticipated decline in the value of
the securities
comprising the underlying index. In such instances, any losses
on the Futures
transaction will not be offset by gains on any portfolio
securities comprising
such index, as might occur in connection with a hedging
transaction. The risks
related to transactions in options, Futures Contracts,
Options on Futures
Contracts and Forward Contracts entered into by the Fund are
set forth in
greater detail in the Statement of Additional Information,
which should be
reviewed in conjunction with the foregoing discussion.
PORTFOLIO TRADING
The Fund intends to manage its portfolio by buying and selling
securities to
help attain its investment objective. The Fund will engage in
portfolio trading
if it believes a transaction, net of costs (including custodian
charges), will
help in attaining its investment objective (see "Portfolio
Transactions and
Brokerage Commissions" in the Statement of Additional
Information).
The primary consideration in placing portfolio security
transactions with
broker-dealers for execution is to obtain, and maintain the
availability of,
execution at the most favorable prices and in the most
effective manner
possible. Consistent with the foregoing primary consideration, the
Rules of Fair
Practice of the National Association of Securities Dealers,
Inc. (the "NASD")
and such other policies as the Trustees may determine, the
Adviser may consider
sales of shares of the Fund and of other investment company
clients of MFD, the
Fund's distributor, as a factor in the selection of broker-
dealers to execute
the Fund's portfolio transactions. From time to time, the
Adviser may direct
certain portfolio transactions to broker-dealer firms which,
in turn, have
agreed to pay a portion of the Fund's operating expenses (e.g.,
fees charged by
the custodian of the Fund's assets). For a further discussion
of portfolio
trading, see the Statement of Additional Information.
--------------------
The policies described above are not fundamental and may be
changed without
shareholder approval, as may the Fund's investment objective. A
change in the
Fund's investment objective may result in the Fund having
an investment
objective different from the objective which the
shareholder considered
appropriate at the time of investment in the Fund.
The Statement of Additional Information includes a
discussion of other
investment policies and a listing of specific investment
restrictions which
govern the Fund's investment policies. The specific investment
restrictions
listed in the Statement of Additional Information may not be
changed without
shareholder approval (see "Investment Restrictions" in the
Statement of
Additional Information). The Fund's investment limitations,
policies and rating
standards are adhered to at the time of purchase or utilization
of assets; a
subsequent change in circumstances will not be considered to
result in a
violation of policy.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an
Investment Advisery
Agreement dated September 1, 1993 (the "Advisery Agreement").
The Adviser
provides the Fund with overall investment advisory and
administrative services,
as well as general office facilities. Kevin R. Parke, a Senior
Vice President of
the Adviser, has been the Fund's portfolio manager since 1988.
Mr. Parke has
been employed by the Adviser since 1985. Subject to such
policies as the
Trustees may determine, the Adviser makes investment decisions for
the Fund. For
its services and facilities, the Adviser receives a management
fee, computed and
paid monthly, in an amount equal to 0.75% of the Fund's average
daily net assets
for its then-current fiscal year.
For the Fund's fiscal year ended November 30, 1994, MFS received
management fees
under the Fund's Advisery Agreement of $3,217,779.
MFS also serves as investment adviser to each of the other
funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal
Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special
Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable
Insurance Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund,
Inc. and seven
variable accounts, each of which is a registered investment
company established
by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination
fixed/variable
annuity contracts. MFS and its wholly owned subsidiary, MFS
Asset Management,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and
its predecessor
organizations have a history of money management dating from
1924 and the
founding of the first mutual fund in the United States,
Massachusetts Investors
Trust. Net assets under the management of the MFS
organization were
approximately $34.5 billion on behalf of approximately 1.6
million investor
accounts as of February 28, 1995. As of such date, the MFS
organization managed
approximately $11.5 billion of assets invested in equity
securities and
approximately $19.5 billion of assets invested in fixed
income securities.
Approximately $3.1 billion of the assets managed by MFS are
invested in
securities of foreign issuers and non-U.S. dollar denominated
securities of U.S.
issuers. MFS is a wholly owned subsidiary of Sun Life of Canada
(U.S.), which in
turn is a wholly owned subsidiary of Sun Life Assurance Company
of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L.
Shames, Arnold D.
Scott, John D. McNeil and John R. Gardner. Mr. Brodkin is the
Chairman, Mr.
Shames is the President and Mr. Scott is the Secretary and a
Senior Executive
Vice President of MFS. Messrs. McNeil and Gardner are the
Chairman and
President, respectively, of Sun Life. Sun Life, a mutual life
insurance company,
is one of the largest international life insurance companies
and has been
operating in the United States since 1895, establishing a
headquarters office
here in 1973. The executive officers of MFS report to the Chairman
of Sun Life.
A. Keith Brodkin, the Chairman of MFS, is the Chairman and
President of the
Trust. W. Thomas London, Stephen E. Cavan, James R. Bordewick,
Jr., Leslie J.
Nanberg and James O. Yost, all of whom are officers of MFS, are
officers of
the Trust.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the
distributor of
shares of the Fund and also serves as distributor for each of
the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the
"Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs
transfer agency,
certain dividend disbursing agency and other services for the
Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering
price through any
securities dealer, certain banks and other financial institutions
having selling
agreements with MFD. Non-securities dealer financial
institutions will receive
transaction fees that are the same as commission fees to
dealers. Securities
dealers and other financial institutions may also charge their
customers fees
relating to investments in the Fund.
The Fund offers two classes of shares which bear sales charges and
distribution
fees in different forms and amounts:
CLASS A SHARES: Class A shares are offered at net asset value plus
an initial
sales charge (or CDSC in the case of certain purchases of $1
million or more) as
follows:
<TABLE>
- ------------------------------------------------------------------
- --------------------------------------------------------------
<CAPTION>
SALES CHARGE<F1> AS
PERCENTAGE OF:
------
- ---------------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE
OFFERING PRICE INVESTED OF OFFERING PRICE
<S>
<C> <C> <C>
Less than $50,000 ........................................
5.75% 6.10% 5.00%
$50,000 but less than $100,000 ...........................
4.75 4.99 4.00
$100,000 but less than $250,000 ..........................
4.00 4.17 3.20
$250,000 but less than $500,000 ..........................
2.95 3.04 2.25
$500,000 but less than $1,000,000 ........................
2.20 2.25 1.70
$1,000,000 or more .......................................
None<F2> None<F2> See Below<F2>
<FN>
- ----------
<F1> Because of rounding in the calculation of offering price,
actual sales charges may be more or less than those calculated
using the percentages above.
<F2> A CDSC may apply in certain circumstances. MFD will pay a
commission on purchases of $1 million or more.
</TABLE>
No sales charge is payable at the time of purchase of
Class A shares on
investments of $1 million or more. However, a CDSC may be
imposed on such
investments in the event of a share redemption within 12 months
following the
share purchase, at the rate of 1% on the lesser of the value
of the shares
redeemed (exclusive of reinvested dividends and capital gain
distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable,
and, if so, the
amount of the charge, it is assumed that shares not subject to
the CDSC are the
first redeemed followed by other shares held for the longest
period of time. All
investments made during a calendar month, regardless of when
during the month
the investment occurred, will age one month on the last day of
the month and
each subsequent month. Except as noted below, the CDSC on Class A
shares will be
waived in the case of: (i) exchanges (except that if the shares
acquired by
exchange were then redeemed within 12 months of the initial
purchase (other than
in connection with subsequent exchanges to other MFS Funds),
the charge would
not be waived); (ii) distributions to participants from a
retirement plan
qualified under section 401(a) of the Internal Revenue Code of
1986, as amended
(the "Code") (a "Retirement Plan") due to: (a) a loan from the
plan (repayments
of loans, however, will constitute new sales for purposes of
assessing the
CDSC); (b) "financial hardship" of the participant in the plan,
as that term is
defined in Treasury Regulation Section 1.401(k)-1 (d)(2), as
amended from time
to time; or (c) the death of a participant in such a plan; (iii)
distributions
from a 403(b) plan or an Individual Retirement Account ("IRA"),
due to death,
disability, or attainment of age 59 1/2; (iv) tax-free
returns of excess
contributions to an IRA; (v) distributions by other employee
benefit plans to
pay benefits; and (vi) certain involuntary redemptions and
redemptions in
connection with certain automatic withdrawals from a qualified
retirement plan.
The CDSC on Class A shares will not be waived, however, if the
Retirement Plan
withdraws from the Fund, except that if the Retirement Plan
has invested its
assets in Class A shares of 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 Retirement
Plan first invests its assets in Class A shares of one or more of
the MFS Funds,
the CDSC on Class A shares will be waived in the case of a
redemption of all of
the Retirement Plan's shares (including shares of any other
class) in all MFS
Funds (i.e., all the assets of the Retirement Plan invested in the
MFS Funds are
withdrawn), unless immediately prior to the redemption, the
aggregate amount
invested by the Retirement Plan in Class A shares of the MFS
Funds (excluding
the reinvestment of distributions) during the prior four year
period equals 50%
or more of the total value of the Retirement Plan's assets in the
MFS Funds, in
which case the CDSC will not be waived. The CDSC on Class A
shares will be
waived upon redemption by a Retirement Plan where the redemption
proceeds are
used to pay expenses of the Retirement Plan or certain expenses
of participants
under the Retirement Plan (e.g., participant account fees),
provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental
401(k) Plansm or
another similar recordkeeping system made available by the
Shareholder Servicing
Agent. The CDSC on Class A shares will be waived upon the
transfer of
registration from shares held by a Retirement Plan through a
single account
maintained by the Shareholder Servicing Agent to multiple Class A
share accounts
maintained by the Shareholder Servicing Agent on behalf
of individual
participants in the Retirement Plan, provided that the Retirement
Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plansm or another similar
recordkeeping
system made available by the Shareholder Servicing Agent. Any
applicable CDSC
will be deferred upon an exchange of Class A shares of the
Fund for units of
participation of the MFS Fixed Fund (a bank collective
investment fund) (the
"Units"), and the CDSC will be deducted from the redemption
proceeds when such
Units are subsequently redeemed (assuming the CDSC is then
payable). No CDSC
will be assessed upon an exchange of Units for Class A shares of
the Fund. For
purposes of calculating the CDSC payable upon redemption of
Class A shares of
the Fund or Units acquired pursuant to one or more exchanges, the
period during
which the Units are held will be aggregated with the period
during which the
Class A shares are held. MFD shall receive all CDSCs.
MFD allows discounts to dealers (which are alike for all
dealers) from the
applicable public offering price, as shown in the above table.
In the case of
the maximum sales charge, the dealer retains 5% and MFD retains
approximately
3/4 of 1% of the public offering price. The sales charge may
vary depending on
the number of shares of the Fund as well as certain MFS Funds
and other funds
owned or being purchased, the existence of an agreement to
purchase additional
shares during a 13-month period (or 36-month period for purchases
of $1 million
or more) or other special purchase programs. A description
of the Right of
Accumulation, Letter of Intent and Group Purchases privileges by
which the sales
charge may be reduced is set forth in the Statement of Additional
Information.
In addition, MFD, on behalf of the Fund and pursuant to the
Fund's Class A
Distribution Plan, will pay a commission to dealers who
initiate and are
responsible for purchases of $1 million or more as follows: 1.00%
on sales up to
$5 million, plus 0.25% on the amount in excess of $5 million.
Purchases of $1
million or more for each shareholder account will be aggregated
over a 12-month
period (commencing from the date of the first such purchase)
for purposes of
determining the level of commissions to be paid during that
period with respect
to such account.
Class A shares of the Fund may be sold at their net asset value to
the officers
of the Trust, to any of the subsidiary companies of Sun Life,
to eligible
Directors, officers, employees (including retired employees) and
agents of MFS,
Sun Life or any of their subsidiary companies, to any
trust, pension,
profit-sharing or any other benefit plan for such persons, to
any trustees and
retired trustees of any investment company for which MFD serves
as distributor
or principal underwriter, and to certain family members of such
individuals and
their spouses, provided the shares will not be resold except to
the Fund. Class
A shares of the Fund may be sold at net asset value to any
employee, partner,
officer or trustee of any sub-advisor to any MFS Fund and to
certain family
members of such individuals and their spouses, or to any
trust, pension,
profit-sharing or other retirement plan for the sole benefit of
such employee or
representative, provided such shares will not be resold
except to the Fund.
Class A shares of the Fund may also be sold at their net asset
value to any
employee or registered representative of any dealer or
other financial
institution which has a sales agreement with MFD or its
affiliate, to certain
family members of such employees or representatives and their
spouses, or to any
trust, pension, profit-sharing or other retirement plan for the
sole benefit of
such employee or representative, as well as to clients of
the MFS Asset
Management, Inc. Class A shares may be sold at net asset
value, subject to
appropriate documentation, through a dealer where the amount
invested represents
redemption proceeds from a registered open-end management
investment company not
distributed or managed by MFD or its affiliates if: (i) the
redeemed shares were
subject to an initial sales charge or a deferred sales charge
(whether or not
actually imposed); (ii) such redemption has occurred no more than
90 days prior
to the purchase of Class A shares of the Fund; and (iii) the
Fund, MFD or its
affiliates have not agreed with such company or its
affiliates, formally or
informally, to sell Class A shares at net asset value or
provide any other
incentive with respect to such redemption and sale. In addition,
Class A shares
may be sold at their net asset value in connection with the
acquisition or
liquidation of the assets of other investment companies or
personal holding
companies. Insurance company separate accounts may purchase
Class A shares of
the Fund at their net asset value. Class A shares of the Fund
may be purchased
at net asset value by retirement plans whose party administrators
have entered
into an administrative services agreement with MFD or one or
more of its
affiliates to perform certain administrative services,
subject to certain
operational requirements specified from time to time by MFD or
one or more of
its affiliates. Class A shares of the Fund may be purchased at
net asset value
through certain broker-dealers and other financial
institutions which have
entered into an agreement with MFD which includes a requirement
that such shares
be sold for the benefit of clients participating in a "wrap
account" or a
similar program under which such clients pay a fee to such
broker-dealer or
other financial institution.
Class A shares of the Fund may be purchased at net asset
value by certain
retirement plans subject to the Employee Retirement Income
Security Act of 1974,
as amended, subject to the following:
(i) the sponsoring organization must demonstrate to the
satisfaction of MFD
that either (a) the employer has at least 25 employees or (b)
the aggregate
purchases by the retirement plan of Class A shares of the MFS
Funds will be
in an amount of at least $250,000 within a reasonable
period of time, as
determined by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the
event of certain
redemption transactions within 12 months following such
purchases.
Dealers who initiate and are responsible for purchases of Class A
shares of the
Fund in this manner will be paid a commission by MFD, as follows:
1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5
million; provided,
however, that MFD may pay a commission, on sales in excess of
$5 million to
certain retirement plans, of 1.00% to certain dealers
which, at MFD's
invitation, enter into an agreement with MFD in which the
dealer agrees to
return any commission paid to it on the sale (or on a pro rata
portion thereof)
if the shareholder redeems his or her shares within a period
of time after
purchase as specified by MFD. Purchases of $1 million or
more for each
shareholder account will be aggregated over a 12-month period
(commencing from
the date of the first such purchase) for purposes of determining
the level of
commissions to be paid during that period with respect to such
account.
Class A shares of the Fund may be purchased at net asset value
by retirement
plans qualified under section 401(k) of the Code through certain
broker-dealers
and other financial institutions which have entered into an
agreement with MFD
which includes certain minimum size qualifications for such
retirement plans and
provides that the broker-dealers or other financial institution
will perform
certain administrative services with respect to the plan's
account. Class A
shares of the Fund may be sold at net asset value through
the automatic
reinvestment of Class A and Class B distributions which
constitute required
withdrawals from qualified retirement plans. Furthermore, Class A
shares of the
Fund may be sold at net asset value through the automatic
reinvestment of
distributions of dividends and capital gains of other MFS Funds
pursuant to the
Distribution Investment Program (see "Shareholder Services" in
the Statement of
Additional Information).
CLASS B SHARES: Class B shares are offered at net asset value
without an initial
sales charge but subject to a CDSC as follows:
YEAR OF
CONTINGENT
REDEMPTION DEFERRED
SALES
AFTER PURCHASE CHARGE
-------------- ----------
- ----
First ............................................. 4%
Second ............................................ 4%
Third ............................................. 3%
Fourth ............................................ 3%
Fifth ............................................. 2%
Sixth ............................................. 1%
Seventh and following ............................. 0%
- ----------
For Class B shares purchased prior to January 1, 1993, the Fund
imposes a CDSC
as a percentage of original purchase price or redemption
proceeds, as
applicable:
YEAR OF
CONTINGENT
REDEMPTION DEFERRED
SALES
AFTER PURCHASE CHARGE
-------------- ----------
- ----
First ............................................. 6%
Second ............................................ 5%
Third ............................................. 4%
Fourth ............................................ 3%
Fifth ............................................. 2%
Sixth ............................................. 1%
Seventh and following ............................. 0%
No CDSC is paid upon an exchange of shares. For purposes of
calculating the CDSC
upon redemption of shares acquired in an exchange, the
purchase of shares
acquired in one or more exchanges is deemed to have occurred at
the time of the
original purchase of the exchanged shares. See "Redemptions and
Repurchases --
Contingent Deferred Sales Charge" for further discussion of the
CDSC.
The CDSC on Class B shares will be waived upon the death or
disability (as
defined in section 72(m)(7) of the Code) of any investor,
provided the account
is registered (i) in the case of a deceased individual, solely
in the deceased
individual's name, (ii) in the case of a disabled individual,
solely or jointly
in the disabled individual's name or (iii) in the name of a living
trust for the
benefit of the deceased or disabled individual. The CDSC on Class
B shares will
also be waived in the case of redemptions of shares of the Fund
pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B
shares will be
waived in the case of distributions from an IRA, SAR-SEP or any
other retirement
plan qualified under sections 401(a) or 403(b) of the Code,
due to death or
disability, or in the case of required minimum distributions
from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class
B shares will
be waived in the case of distributions from a Retirement Plan due
to (i) returns
of excess contribution to the plan, (ii) retirement of a
participant in the
plan, (iii) a loan from the plan (repayments of loans, however,
will constitute
new sales for purposes of assessing the CDSC), (iv) "financial
hardship" of the
participant in the plan, as that term is defined in Treasury
Regulation Section
1.401(k)1(d)(2), as amended from time to time, and (v) termination
of employment
of the participant in the plan (excluding, however, a
partial or other
termination of the plan). The CDSC on Class B shares will be
waived in the case
of distributions from a SAR-SEP due to (i) returns of excess
contribution to the
plan, (ii) retirement of a participant in the plan and (iii)
termination of
employment of the participant in the plan (excluding, however,
a partial or
other termination of the plan). The CDSC on Class B shares will
also be waived
upon redemption by (i) officers of the Fund, (ii) any of
the subsidiary
companies of Sun Life, (iii) eligible Directors, officers,
employees (including
retired and former employees) and agents of MFS, Sun Life
or any of their
subsidiary companies, (iv) any trust, pension, profit-sharing
or any other
benefit plan for such persons, (v) any trustees and retired
trustees of any
investment company for which MFD serves as distributor or
principal underwriter,
and (vi) certain family members of such individuals and their
spouses, provided
in each case that the shares will not be resold except to the
Fund. The CDSC on
Class B shares will also be waived in the case of redemptions by
any employee or
registered representative of any dealer or other financial
institution which has
a sales agreement with MFD, by certain family members of any
such employee or
representative and their spouses, by any trust, pension, profit-
sharing or other
retirement plan for the sole benefit of such employee or
representative and by
clients of the MFS Asset Management, Inc. A Retirement Plan
that has invested
its assets in Class B shares of 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 the
Retirement Plan first invests its assets in Class B shares of one
or more of the
MFS Funds will have the CDSC on Class B shares waived in
the case of a
redemption of all the Retirement Plan's shares (including
shares of any other
class) in all MFS Funds (i.e., all the assets of the Retirement
Plan invested in
the MFS Funds are withdrawn), except that if, immediately
prior to the
redemption, the aggregate amount invested by the Retirement
Plan in Class B
shares of the MFS Funds (excluding the reinvestment of
distributions) during the
prior four year period equals 50% or more of the total value of
the Retirement
Plan's assets in the MFS Funds, then the CDSC will not be
waived. The CDSC on
Class B shares will be waived upon redemption by a Retirement
Plan where the
redemption proceeds are used to pay expenses of the Retirement
Plan or certain
expenses of participants under the Retirement Plan (e.g.,
participant account
fees), provided that the Retirement Plan's sponsor
subscribes to the MFS
Fundamental 401(k) Plansm or another similar recordkeeping system
made available
by the Shareholder Servicing Agent. The CDSC on Class B shares
will be waived
upon the transfer of registration from shares held by a
Retirement Plan through
a single account maintained by the Shareholder Servicing Agent to
multiple Class
B share accounts, maintained by the Shareholder Servicing
Agent on behalf of
individual participants in the Retirement Plan, provided that
the Retirement
Plan's sponsor subscribes to the MFS Fundamental 401(k)
Plansm or another
similar recordkeeping system made available by the Shareholder
Servicing Agent.
The CDSC on Class B shares may also be waived in connection with
the acquisition
or liquidation of the assets of other investment companies or
personal holding
companies.
CONVERSION OF CLASS B SHARES -- Class B shares of the Fund
that remain
outstanding for approximately eight years will convert to Class A
shares of the
Fund. Shares purchased through the reinvestment of distributions
paid in respect
of Class B shares will be treated as Class B shares for purposes
of the payment
of the distribution and service fees under the Distribution Plan
applicable to
Class B shares. However, for purposes of conversion to Class
A shares, all
shares in a shareholder's account that were purchased through
the reinvestment
of dividends and distributions paid in respect of Class B shares
(and which have
not converted to Class A shares as provided in the following
sentence) will be
held in a separate sub-account. Each time any Class B
shares in the
shareholder's account (other than those in the sub-account)
convert to Class A
shares, a portion of the Class B shares then in the sub-
account will also
convert to Class A shares. The portion will be determined by the
ratio that the
shareholder's Class B shares not acquired through reinvestment of
dividends and
distributions that are converting to Class A shares bear to the
shareholder's
total Class B shares not acquired through such reinvestment. The
conversion of
Class B shares to Class A shares is subject to the continuing
availability of a
ruling from the Internal Revenue Service or an opinion of
counsel that such
conversion will not constitute a taxable event for Federal tax
purposes. There
can be no assurance that such ruling or opinion will be
available, and the
conversion of Class B shares to Class A shares will not occur if
such ruling or
opinion is not available. In such event, Class B shares would
continue to be
subject to higher expenses than Class A shares for an indefinite
period.
GENERAL -- Except as described below, the minimum initial
investment is $1,000
per account and the minimum additional investment is $50 per
account. Accounts
being established for monthly automatic investments and under
payroll savings
programs and tax-deferred retirement programs (other than IRAs)
involving the
submission of investments by means of group remittal statements
are subject to a
$50 minimum on initial and additional investments per
account. The minimum
initial investment for IRAs is $250 per account and the
minimum additional
investment is $50 per account. Accounts being established for
participation in
the Automatic Exchange Plan are subject to a $50 minimum on
initial and
additional investments per account. There are also other limited
exceptions to
these minimums for certain tax-deferred retirement programs. Any
minimums may be
changed at any time at the discretion of MFD. The Fund
reserves the right to
cease offering its shares for sale at any time.
For shareholders who elect to participate in certain investment
programs (e.g.,
the Automatic Investment Plan) or other shareholder
services, MFD or its
affiliates may either (i) give a gift of nominal value, such
as a hand-held
calculator, or (ii) make a nominal charitable contribution on
their behalf.
A shareholder whose shares are held in the name of, or
controlled by, an
investment dealer, might not receive many of the privileges and
services from
the Fund (such as Right of Accumulation, Letter of Intent
and certain
recordkeeping services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes
only. The Fund
and MFD each reserve the right to reject any specific
purchase order or to
restrict purchases by a particular purchaser (or group of related
purchasers).
The Fund or MFD may reject or restrict any purchases by a
particular purchaser
or group, for example, when such purchase is contrary to the
best interests of
the Fund's other shareholders or otherwise would disrupt the
management of the
Fund.
MFD may enter into an agreement with shareholders who intend to
make exchanges
among certain classes of certain MFS Funds (as determined by MFD)
which follow a
timing pattern, and with individuals or entities acting on such
shareholders'
behalf (collectively, "market timers"), setting forth the terms,
procedures and
restrictions with respect to such exchanges. In the absence
of such an
agreement, it is the policy of the Fund and MFD to reject or
restrict purchases
by market timers if (i) more than two exchange purchases are
effected in a timed
account in the same calendar quarter or (ii) a purchase would
result in shares
being held in timed accounts by market timers representing
more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts
in the case of
certain MFS Funds which may include the Fund and which may
change from time to
time. The Fund and MFD each reserve the right to request market
timers to redeem
their shares at net asset value, less any applicable CDSC, if
either of these
restrictions is violated.
Securities dealers and other financial institutions may
receive different
compensation with respect to sales of Class A and Class B shares.
From time to
time, MFD may pay dealers 100% of the applicable sales charge on
sales of Class
A shares of certain specified MFS Funds sold by such dealer
during a specified
sales period. In addition, MFD or its affiliates may, from
time to time, pay
dealers an additional commission equal to 0.50% of the net
asset value of all
the Class B 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 shares of the Fund. The
staff of the SEC
has indicated that dealers who receive more than 90% of the sales
charge may be
considered underwriters. Such concessions provided by MFD may
include financial
assistance to dealers in connection with preapproved
conferences or seminars,
sales or training programs for invited registered
representatives, payment for
travel expenses, including lodging, incurred by registered
representatives and
members of their families or other invited guests to various
locations for such
seminars or training programs, seminars for the public,
advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-
sponsored events.
In some instances, these concessions may be offered to
dealers or only to
certain dealers who have sold or may sell, during specified
periods, certain
minimum amounts of shares of the Fund. Other concessions may be
offered to the
extent not prohibited by the laws of any state or any self-
regulatory agency,
such as the National Association of Securities Dealers, Inc. (the
"NASD").
The Glass-Steagall Act prohibits national banks from engaging in
the business of
underwriting, selling or distributing securities. Although
the scope of the
prohibition has not been clearly defined, MFD believes that such
Act should not
preclude banks from entering into agency agreements with MFD
(as described
above). If, however, a bank were prohibited from so acting, the
Trustees would
consider what actions, if any, would be necessary to
continue to provide
efficient and effective shareholder services. It is not
expected that
shareholders would suffer any adverse financial consequence as a
result of these
occurrences. In addition, state securities laws on this issue
may differ from
the interpretation of federal law expressed herein, and banks
and financial
institutions may be required to register as broker-dealers
pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of
the shares in an
account with the Fund for which payment has been received by the
Fund (i.e., an
established account) may be exchanged for shares of the same class
of any of the
other MFS Funds (if available for sale) at net asset value.
Shares of one class
may not be exchanged for shares of any other class. Exchanges
will be made only
after instructions in writing or by telephone (an "Exchange
Request") are
received for an established account by the Shareholder Servicing
Agent in proper
form (i.e., if in writing -- signed by the record owner(s) exactly
as the shares
are registered; if by telephone -- proper account identification
is given by the
dealer or shareholder of record); and each exchange must involve
either shares
having an aggregate value of at least $1,000 ($50 in the case of
retirement plan
participants whose sponsoring organizations subscribe to the
MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made
available by the
Shareholder Servicing Agent) or all the shares in the account.
If the Exchange
Request is received by the Shareholder Servicing Agent on any
business day prior
to the close of regular trading on the Exchange, the exchange
usually will occur
on that day if all the requirements set forth above have been
complied with at
that time. No more than five exchanges may be made in any one
Exchange Request
by telephone. Additional information concerning this exchange
privilege and
prospectuses for any of the other MFS Funds may be obtained
from investment
dealers or the Shareholder Servicing Agent. A shareholder
should read the
prospectus of the other MFS Fund and consider the differences in
objectives and
policies before making any exchange. For federal and (generally)
state income
tax purposes, an exchange is treated as a sale of the shares
exchanged and,
therefore, an exchange could result in a gain or loss to the
shareholder making
the exchange. Exchanges by telephone are automatically
available to most non-
retirement plan accounts and certain retirement plan
accounts. For further
information regarding exchanges by telephone see "Redemptions By
Telephone." The
exchange privilege (or any aspect of it) may be changed or
discontinued and is
subject to certain limitations, including certain restrictions
on purchases by
market timers. Special procedures privileges and restrictions
with respect to
exchanges may apply to market timers who enter into an agreement
with MFD, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in
his account on
any date on which the Fund is open for business by redeeming
shares at their net
asset value or by selling such shares to the Fund through
a dealer (a
repurchase). Since the net asset value of shares of the
account fluctuates,
redemptions or repurchases, which are taxable transactions, are
likely to result
in gains or losses to the shareholder. When a shareholder
withdraws an amount
from his account, the shareholder is deemed to have tendered
for redemption a
sufficient number of full and fractional shares in his account
to cover the
amount withdrawn. The proceeds of a redemption or repurchase
will normally be
available within seven days, except for shares purchased, or
received in
exchange for shares purchased, by check (including certified
checks or cashier's
checks); payment of redemption proceeds may be delayed for up
to 15 days from
the purchase date in an effort to assure that such check has
cleared. Payment of
redemption proceeds may be delayed for up to seven days from the
redemption date
if the Fund determines that such a delay would be in the best
interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to
redeem all or any
portion of the shares in his account by mailing or delivering to
the Shareholder
Servicing Agent (see back cover for address) a stock power
with a written
request for redemption or a letter of instruction, together
with his share
certificates (if any were issued), all in "good order" for
transfer. "Good
order" generally means that the stock power, written request
for redemption,
letter of instruction or certificate must be endorsed by the
record owner(s)
exactly as the shares are registered and the signature(s) must be
guaranteed in
the manner set forth below under the caption "Signature
Guarantee." In addition,
in some cases "good order" may require the furnishing of
additional documents.
The Shareholder Servicing Agent may make certain de minimis
exceptions to the
above requirements for redemption. Within seven days after
receipt of a
redemption request in "good order" by the Shareholder Servicing
Agent, the Fund
will make payment in cash of the net asset value of the shares
next determined
after such redemption request was received, reduced by the
amount of any
applicable CDSC described above and the amount of any income tax
required to be
withheld, except during any period in which the right of
redemption is suspended
or date of payment is postponed because the Exchange is closed or
trading on the
Exchange is restricted or to the extent otherwise permitted by
the 1940 Act, if
an emergency exists (see "Tax Status").
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an
amount from his
account by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-
2606. Shareholders wishing to avail themselves of this
telephone redemption
privilege must so elect on their Account Application,
designate thereon a
commercial bank and account number to receive the proceeds of
such redemption,
and sign the Account Application Form with the signature(s)
guaranteed in the
manner set forth below under the caption "Signature Guarantee".
The proceeds of
such a redemption, reduced by the amount of any applicable CDSC
described above
and the amount of any income tax required to be withheld, are
mailed by check to
the designated account, without charge. As a special service,
investors may
arrange to have proceeds in excess of $1,000 wired in federal
funds to the
designated account. If a telephone redemption request is
received by the
Shareholder Servicing Agent by the close of regular trading on
the Exchange on
any business day, shares will be redeemed at the closing net
asset value of the
Fund on that day. Subject to the conditions described in this
section, proceeds
of a redemption are normally mailed or wired on the next business
day following
the date of receipt of the order for redemption. The Shareholder
Servicing Agent
will not be responsible for any losses resulting from
unauthorized telephone
transactions if it follows reasonable procedures designed to
verify the identity
of the caller. The Shareholder Servicing Agent will request
personal or other
information from the caller, and will normally also record calls.
Shareholders
should verify the accuracy of confirmation statements
immediately after their
receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell
his shares at
net asset value through his securities dealer (a repurchase),
the shareholder
can place a repurchase order with his dealer, who may charge the
shareholder a
fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR
TO THE CLOSE OF
REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD
BEFORE THE CLOSE OF
BUSINESS ON THE SAME DAY, THE SHAREHOLDER WILL RECEIVE THE
NET ASSET VALUE
CALCULATED ON THAT DAY.
GENERAL: Shareholders of the Fund who have redeemed their shares
have a one-time
right to reinvest the redemption proceeds in the same class of
shares of any of
the MFS Funds (if shares of such Fund are available for sale) at
net asset value
(with a credit for any CDSC paid) within 90 days of the
redemption pursuant to
the Reinstatement Privilege. If the shares credited for any CDSC
paid are then
redeemed within six years of the initial purchase in the case of
Class B shares,
or within 12 months of the initial purchase for certain Class A
share purchases,
a CDSC will be imposed upon redemption. Such purchases under the
Reinstatement
Privilege are subject to all limitations in the Statement
of Additional
Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations,
the Fund has
reserved the right to pay the redemption or repurchase price of
shares of the
Fund, either totally or partially, by a distribution in kind
of portfolio
securities (instead of cash). The securities so distributed
would be valued at
the same amount as that assigned to them in calculating the net
asset value for
the shares being sold. If a shareholder received a distribution
in kind, the
shareholder could incur brokerage or transaction charges in
converting the
securities to cash.
Due to the relatively high cost of maintaining small accounts, the
Fund reserves
the right to redeem shares in any account for their then-current
value (which
will be promptly paid to the shareholder) if at any time the total
investment in
such account drops below $500 because of redemptions, except
in the case of
accounts established for monthly automatic investments and
certain payroll
savings programs, Automatic Exchange Plan accounts and tax-
deferred retirement
plans, for which there is a lower minimum investment
requirement (see
"Purchases"). Shareholders will be notified that the value of
their account is
less than the minimum investment requirement and allowed 60
days to make an
additional investment before the redemption is processed.
No CDSC will be
imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE -- In order to protect shareholders to the
greatest extent
possible against fraud, the Fund requires in certain
instances as indicated
above that the shareholder's signature be guaranteed. In
these cases the
shareholder's signature must be guaranteed by an eligible bank,
broker, dealer,
credit union, national securities exchange, registered securities
association,
clearing agency or savings association. Signature guarantees
shall be accepted
in accordance with policies established by the Shareholder
Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE -- Investments ("Direct
Purchases") will be
subject to a CDSC for a period of 12 months (in the case of
purchases of $1
million or more of Class A shares) or six years (in the case of
purchases of
Class B shares). Purchases of Class A shares made during a
calendar month,
regardless of when during the month the investment occurred, will
age one month
on the last day of the month and each subsequent month. Class B
shares purchased
on or after January 1, 1993 will be aggregated on a calendar
month basis -- all
transactions made during a calendar month, regardless of when
during the month
they have occurred, will age one year at the close of business
on the last day
of such month in the following calendar year and each subsequent
year. For Class
B shares of the Fund purchased prior to January 1, 1993,
transactions will be
aggregated on a calendar year basis -- all transactions made
during a calendar
year, regardless of when during the year they have occurred,
will age one year
at the close of business on December 31 of that year and each
subsequent year.
At the time of a redemption, the amount by which the value of a
shareholder's
account for a particular class represented by Direct Purchases
exceeds the sum
of the six calendar year aggregations (12 months in the case of
purchases of $1
million or more of Class A shares) of Direct Purchases may be
redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on
additional shares
acquired through the automatic reinvestment of dividends or
capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular
class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of
redemption equal
to the then-current value of Reinvested Shares is not subject to
the CDSC, but
(iii) any amount of the redemption in excess of the
aggregate of the
then-current value of Reinvested Shares and the Free Amount
is subject to a
CDSC. The CDSC will first be applied against the amount of
Direct Purchases
which will result in any such charge being imposed at the lowest
possible rate.
The CDSC to be imposed upon redemptions will be calculated
as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges
or transfers of
registration, except that, with respect to transfers of
registration to an IRA
rollover account, the CDSC will be waived if the shares being
reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class
A and Class B
shares 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
plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides
that the Fund
will pay MFD a distribution/service fee aggregating up to (but
not necessarily
all of) 0.35% of the average daily net assets attributable to
Class A shares
annually in order that MFD may pay expenses on behalf of the Fund
related to the
distribution and servicing of Class A shares. The expenses to be
paid by MFD on
behalf of the Fund include a service fee to securities dealers
which enter into
a sales agreement with MFD of up to 0.25% per annum of the Fund's
average daily
net assets attributable to Class A shares that are owned by
investors for whom
such securities dealer is the holder or dealer of record. This
fee is intended
to be partial consideration for all personal services and/or
account maintenance
services rendered by the dealer with respect to Class A shares.
MFD may from
time to time reduce the amount of the service fee paid for shares
sold prior to
a certain date. MFD may also retain a distribution fee of 0.10%
per annum of the
Fund's average daily net assets attributable to Class A
shares as partial
consideration for services performed and expenses incurred in the
performance of
MFD's obligations under its distribution agreement with the
Fund. In addition,
to the extent that the aggregate of the foregoing fees does not
exceed 0.35% per
annum of the average daily net assets of the Fund
attributable to Class A
shares, the Fund is permitted to pay other distribution-
related expenses,
including commissions to dealers and payments to wholesalers
employed by MFD for
sales at or above a certain dollar level. Fees payable under
the Class A
Distribution Plan are charged to, and therefore reduce, income
allocated to
Class A shares. Service fees may be reduced for a securities
dealer that is the
holder or dealer of record for an investor who owns shares of the
Fund having a
net asset value at or above a certain dollar level. Payments
under the Class A
Distribution Plan will commence on the date on which the value of
the Fund's net
assets attributable to Class A shares first equals or exceeds
$40,000,000, at
which time MFD intends to waive the 0.10% per annum distribution
fee to which it
is entitled under the plan until such time as the payment
of this fee is
approved by the Trust's Board of Trustees. 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 Class A
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. Certain banks and other financial
institutions that
have agency agreements with MFD will receive service fees that
are the same as
service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides
that the Fund
will pay MFD a daily distribution fee equal, on an annual basis,
to 0.75% of the
Fund's average daily net assets attributable to Class B shares
and will pay MFD
a service fee of up to 0.25% per annum of the Fund's average
daily net assets
attributable to Class B shares (which MFD will in turn pay to
securities dealers
which enter into a sales agreement with MFD at a rate of up to
0.25% per annum
of the Fund's average daily net assets attributable to Class B
shares owned by
investors for whom that securities dealer is the holder or
dealer of record).
This service fee is intended to be additional consideration
for all personal
services and/or account maintenance services rendered by the
dealer with respect
to Class B shares. Fees payable under the Class B Distribution
Plan are charged
to, and therefore reduce, income allocated to Class B
shares. The Class B
Distribution Plan also provides that MFD will receive all CDSCs
attributable to
Class B shares (see "Redemptions and Repurchases of Shares"
above), which do not
reduce the distribution fee. 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 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. Therefore, the total amount paid to a dealer
upon the sale of
shares is 4.00% of the purchase price of the shares (commission
rate of 3.75%
plus service fee equal to 0.25% of the purchase price).
Dealers will become
eligible for additional service fees with respect to such shares
commencing in
the thirteenth month following the purchase. 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 Class B
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. The purpose of the distribution
payments to MFD under
the Class B Distribution Plan is to compensate MFD for its
distribution services
to the Fund. Since MFD's compensation is not directly tied to its
expenses, the
amount of compensation received by MFD during any year may be
more or less than
its actual expenses. For this reason, this type of distribution
fee arrangement
is characterized by the staff of the SEC as being of the
"compensation" variety.
However, the Fund is not liable for any expenses incurred by
MFD in excess of
the amount of compensation it receives. The expenses incurred by
MFD, including
commissions to dealers, are likely to be greater than the
distribution fees for
the next several years, but thereafter such expenses may be less
than the amount
of the distribution fees. Certain banks and other financial
institutions that
have agency agreements with MFD will receive agency transaction
and service fees
that are the same as commissions and service fees to dealers.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment
income to its
shareholders as dividends on an annual basis. In determining the
net investment
income available for distributions, the Fund may rely on
projections of its
anticipated net investment income over a longer term, rather than
its actual net
investment income for the period. The Fund may make one or more
distributions
during the calendar year to its shareholders from any long-term
capital gains
and may also make one or more distributions during the
calendar year to its
shareholders from short-term capital gains. Shareholders may
elect to receive
dividends and capital gain distributions in either cash or
additional shares of
the same class with respect to which a distribution is made.
(See "Tax Status"
and "Shareholder Services -- Distribution Options" below.)
Distributions paid by
the Fund with respect to Class A shares will generally be
greater than those
paid with respect to Class B shares because expenses
attributable to Class B
shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of
the Trust for
federal income tax purposes. In order to minimize the taxes
the Fund would
otherwise be required to pay, the Fund intends to qualify
each year as a
"regulated investment company" under Subchapter M of the
Code, and to make
distributions to its shareholders in accordance with the timing
requirements
imposed by the Code. It is expected that the Fund will not be
required to pay
entity level federal income or excise taxes, although foreign-
source income
earned by the Fund may be subject to foreign withholding taxes.
Shareholders of
the Fund normally will have to pay federal income taxes (and any
state or local
taxes), on the dividends and capital gain distributions they
receive from the
Fund, whether paid in cash or additional shares. A portion of
the dividends
received from the Fund (but none of the Fund's capital gain
distributions) may
qualify for the dividends-received deduction for corporations.
A statement setting forth the federal income tax status of all
dividends and
distributions for each calendar year, including the portion
taxable as ordinary
income, the portion taxable as long-term capital gain, the
portion, if any,
representing a return of capital (which is free of current taxes
but results in
a basis reduction), and the amount, if any, of federal income tax
withheld will
be sent to each shareholder promptly after the end of such
calendar year.
Fund distributions will reduce the Fund's net asset
value per share.
Shareholders who buy shares shortly before the Fund makes a
distribution may
thus pay the full price for the shares and then effectively
receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at a
rate of 30% on
dividends and certain other payments that are subject to such
withholding and
that are made to persons who are neither citizens nor residents
of the U.S.,
regardless of whether a lower rate may be permitted under an
applicable law or
treaty. The Fund is also required in certain circumstances to
apply backup
withholding of 31% on taxable dividends and redemption
proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor
a resident of
the U.S.) who does not furnish to the Fund certain
information and
certifications or who is otherwise subject to backup
withholding. However,
backup withholding will not be applied to payments which
have had 30%
withholding taken. Prospective shareholders should read the
Account Application
for information regarding backup withholding of federal income
tax and should
consult their own tax advisor as to the tax consequences of an
investment in the
Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is
determined each day
during which the Exchange is open for trading. This
determination is made once
each day as of the close of regular trading on the Exchange by
deducting the
amount of the liabilities attributable to the class from the value
of the assets
attributable to that class and dividing the difference by the
number of shares
of the class outstanding. Assets in the Fund's portfolio are
valued on the basis
of their current values or otherwise at their fair values, as
described in the
Statement of Additional Information. All investments and assets
are expressed in
U.S. dollars based upon current currency exchange rates. The net
asset value per
share of each class of shares is effective for orders received
by the dealer
prior to its calculation and received by MFD prior to the close of
that business
day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of four series of the Trust, has two classes of
shares, entitled
Class A and Class B Shares of Beneficial Interest (without par
value). The Trust
has reserved the right to create and issue additional classes
and series of
shares, in which case each class of shares of a series would
participate equally
in the earnings, dividends and assets attributable to that
class of that
particular series. Shareholders are entitled to one vote for each
share held and
shares of each series would be entitled to vote separately to
approve investment
advisory agreements or changes in investment restrictions, but
shares of all
series would vote together in the election of Trustees and
selection of
accountants. Additionally, each class of shares of a series will
vote separately
on any material increases in the fees under its Distribution
Plan or on any
other matter that affects solely that class of shares, but will
otherwise vote
together with all other classes of shares of the series on all
other matters.
The Trust does not intend to hold annual shareholder meetings.
The Declaration
of Trust provides that a Trustee may be removed from office in
certain instances
(see "Description of Shares, Voting Rights and Liabilities" in
the Statement of
Additional Information).
Each share of a class of the Fund represents an equal
proportionate interest in
the Fund with each other class share, subject to the
liabilities of the
particular class. Shares have no pre-emptive or conversion rights
(except as set
forth in "Purchases -- Conversion of Class B Shares"). Shares are
fully paid and
non-assessable. Should the Fund be liquidated, shareholders of
each class are
entitled to share pro rata in the net assets attributable
to that class
available for distribution to shareholders. Shares will remain
on deposit with
the Shareholder Servicing Agent and certificates will not be
issued except in
connection with pledges and assignments and in certain
other limited
circumstances.
The Trust is an entity of the type commonly known as a
"Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may,
under certain
circumstances, be held personally liable as partners for its
obligations.
However, the risk of a shareholder incurring financial loss
on account of
shareholder liability is limited to circumstances in which
both inadequate
insurance existed (e.g., fidelity bonding and errors and
omissions insurance)
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return
quotations for
each class of shares and may also quote fund rankings in the
relevant fund
category from various sources, such as the Lipper Analytical
Services, Inc. and
Wiesenberger Investment Companies Service. Total rate of return
quotations will
reflect the average annual percentage change over stated periods
in the value of
an investment, in a class of shares of the Fund made at the
maximum public
offering price of shares of that class and with all distributions
reinvested and
which, if quoted for periods of six years or less, will give
effect to the
imposition of the CDSC assessed upon redemptions of the Fund's
Class B shares.
Such total rate of return quotations may be accompanied by
quotations which do
not reflect the reduction in value of the initial investment
due to the sales
charge or the deduction of a CDSC, and which will thus be
higher. The Fund's
total rate of return quotations are based on historical
performance and are not
intended to indicate future performance. Total rate of return
reflects all
components of investment return over a stated period of
time. The Fund's
quotations may from time to time be used in advertisements,
shareholder reports
or other communications to shareholders. For a discussion of the
manner in which
the Fund will calculate its total rate of return, see the
Statement of
Additional Information. For further information about the Fund's
performance for
the fiscal year ended November 30, 1994, please see the Fund's
Annual Report. A
copy of the Annual Report may be obtained without charge by
contacting the
Shareholder Servicing Agent (see back cover for address and
phone number). In
addition to information provided in shareholder reports, the
Fund may, in its
discretion, from time to time, make a list of all or a portion
of its holdings
available to investors upon request.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services
described below
or concerning other aspects of the Fund should contact the
Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder
will receive
confirmation statements showing the transaction activity in his
account. At the
end of each calendar year, each shareholder will receive income
tax information
regarding reportable dividends and capital gain distributions for
that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available
to all accounts
(except Systematic Withdrawal Plan accounts) and may be
changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in
additional shares.
This option will be assigned if no other option is
specified;
-- Dividends in cash; capital gain distributions reinvested
in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in
additional full and
fractional shares of the same class of shares at the net asset
value in effect
at the close of business on the record date. Checks for
dividends and capital
gain distributions in amounts less than $10 will automatically be
reinvested in
additional shares of the Fund. If a shareholder has elected to
receive dividends
and/or capital gain distributions in cash and the postal or
other delivery
service is unable to deliver checks to the shareholder's address
of record, such
shareholder's distribution option will automatically be converted
to having all
dividends and other distributions reinvested in additional
shares. Any request
to change a distribution option must be received by the
Shareholder Servicing
Agent by the record date for a dividend or distribution in order
to be effective
for that dividend or distribution. No interest will
accrue on amounts
represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of
shareholders, the
Fund makes available the following programs designed to enable
shareholders to
add to their investment in an account with the Fund or withdraw
from it with a
minimum of paper work. The programs involve no extra charge to
shareholders
(other than a sales charge in the case of certain Class A share
purchases) and
may be changed or discontinued at any time by a shareholder or the
Fund.
LETTER OF INTENT: If a shareholder (other than a group
purchaser as
described in the Statement of Additional Information)
anticipates purchasing
$100,000 or more of Class A shares of the Fund alone or in
combination with
shares of any class of other MFS Funds or MFS Fixed Fund
within a 13-month
period (or 36-month period for purchases of $1 million or more),
the shareholder
may obtain such shares at the same reduced sales charge as
though the total
quantity were invested in one lump sum, subject to escrow
agreements and the
appointment of an attorney for redemptions from the escrow
amount if the
intended purchases are not completed, by completing the Letter of
Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for
cumulative quantity
discounts on purchases of Class A shares when his new investment,
together with
the current offering price value of all holdings of all
classes of shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a
bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular
class of the Fund
may be sold at net asset value (and without any applicable
CDSC) through the
automatic reinvestment of dividend and capital gain distributions
from the same
class of another MFS Fund. Furthermore, distributions made by
the Fund may be
automatically invested at net asset value in shares of the same
class of another
MFS Fund, if shares of such Fund are available for sale (and
without any
applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct
the Shareholder
Servicing Agent to send him (or anyone he designates) regular
periodic payments,
as designated on the Account Application and based upon the
value of his
account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at
least $100, except in certain limited circumstances. The
aggregate withdrawals
of Class B shares in any year pursuant to a SWP will not be
subject to a CDSC
and are generally limited to 10% of the value of the account at
the time of the
establishment of the SWP. The CDSC will not be waived in
the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or
more may be made
through a shareholder's checking account twice monthly, monthly
or quarterly.
Required forms are available from the Shareholder Servicing Agent
or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account
balances of at least
$5,000 in any MFS Fund may exchange their shares for the same
class of shares of
the other MFS Funds under the Automatic Exchange Plan, a dollar
cost averaging
program. The Automatic Exchange Plan provides for automatic
monthly or quarterly
exchanges of funds from the shareholder's account in an MFS Fund
for investment
in the same class of shares of other MFS Funds selected by the
shareholder.
Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to
up to four different funds. A shareholder should consider the
objectives and
policies of a fund and review its prospectus before electing to
exchange money
into such fund through the Automatic Exchange Plan. No
transaction fee is
imposed in connection with exchange transactions under the
Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government
Money Market Fund or Class A shares of MFS Cash Reserve Fund will
be subject to
any applicable sales charge. For federal and (generally)
state income tax
purposes, an exchange is treated as a sale of the shares
exchanged and,
therefore, could result in a capital gain or loss to the
shareholder making the
exchange. See the Statement of Additional Information for
further information
concerning the Automatic Exchange Plan. Investors should
consult their tax
advisers for information regarding the potential capital
gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic
purchases of shares
regardless of fluctuating share offering prices, a shareholder
should consider
his financial ability to continue his purchases through
periods of low price
levels. Maintaining a dollar cost averaging program
concurrently with a
withdrawal program could be disadvantageous because of the
sales charges
included in share purchases in the case of Class A shares, and
because of the
assessment of the CDSC for certain share redemptions in the
case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be
purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA
plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing
plans.
Investors should consult with their tax adviser before
establishing any of the
tax-deferred retirement plans described above.
--------------------
The Fund's Statement of Additional Information, dated April 1,
1995, contains
more detailed information about the Trust and the Fund,
including, but not
limited to, information related to (i) investment objective,
policies and
restrictions, including the purchase and sale of options,
Futures Contracts,
Options on Futures Contracts, Forward Contracts and
Options on Foreign
Currencies, (ii) the Trustees, officers and investment adviser,
(iii) portfolio
trading, (iv) the Fund's shares, including rights and
liabilities of
shareholders, (v) tax status of dividends and distributions,
(vi) the Class A
and Class B Distribution Plans, (vii) the method used to calculate
total rate of
return quotations and (viii) various services and privileges
provided by the
Fund for the benefit of its shareholders, including additional
information with
respect to the exchange privilege.
<PAGE>
APPENDIX A
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 fluctuations of
protective elements
may be of greater amplitude or there may be other elements
present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are
to be considered as upper medium grade obligations. Factors
giving security to
principal and interest are considered adequate but elements may be
present which
suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e.,
they are neither highly protected nor poorly secured. Interest
payments and
principal security appear adequate for the present but
certain protective
elements may be lacking or may be characteristically unreliable
over any great
length of time. Such bonds lack outstanding investment
characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative
elements; their
future cannot be considered as well-assured. Often the
protection of interest
and principal payments may be very moderate and thereby not
well safeguarded
during both good and bad times over the future. Uncertainty
of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of
the desirable
investment. Assurance of interest and principal payments or of
maintenance of
other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues
may be in
default or there may be present elements of danger with respect to
principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds
and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a
rating has
been suspended or withdrawn, it may be for reasons unrelated to
the quality of
the issue.
Should no rating be assigned, the reason may be one of the
following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or
companies that
are not rated as a matter of policy;
3. there is a lack of essential data pertaining to the issue
or issuer; and
4. the issue was privately placed, in which case the
rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material
circumstances arise, the
effects of which preclude satisfactory analysis; if there is no
longer available
reasonable up-to-date data to permit a judgment to be formed;
if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P's.
Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and
repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and
repay principal
although it is somewhat more susceptible to the adverse effects
of changes in
circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity
to pay interest
and repay principal. Whereas it normally exhibits
adequate protection
parameters, adverse economic conditions or changing
circumstances are more
likely to lead to a weakened capacity to pay interest and repay
principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to
default than other
speculative issues. However, it faces major ongoing uncertainties
or exposure to
adverse business, financial, or economic conditions which
could lead to
inadequate capacity to meet timely interest and principal
payments. The BB
rating category is also used for debt subordinated to senior
debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but
currently has the
capacity to meet interest payments and principal repayments.
Adverse business,
financial or economic conditions will likely impair capacity or
willingness to
pay interest and repay principal. The B rating category is also
used for debt
subordinated to senior debt that is assigned an actual or
implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability
to default, and
is dependent upon favorable business, financial and economic
conditions to meet
timely payment of interest and repayment of principal. In the
event of adverse
business, financial, or economic conditions, it is not
likely to have the
capacity to pay interest and repay principal. The CCC rating
category is also
used for debt subordinated to senior debt that is assigned an
actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to
senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to
senior debt which
is assigned an actual or implied CCC-debt rating. The C rating
may be used to
cover a situation where a bankruptcy petition has been filed,
but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no
interest is being
paid.
D: Debt rated D is in payment default. The D rating category
is used when
interest payments or principal payments are not made on the date
due even if the
applicable grace period has not expired, unless S&P believes that
such payments
will be made during such grace period. The D rating also will be
used upon the
filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be
modified by the
addition of a plus or minus sign to show relative standing
within the major
categories.
NR: Indicates that no public rating has been requested,
that there is
insufficient information on which to base a rating, or that S&P
does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest
credit quality.
The obligor has an exceptionally strong ability to pay
interest and repay
principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds considered to be investment grade and of very high
credit quality. The
obligor's ability to pay interest and repay principal is very
strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in
the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future
developments, short-term debt of these issuers is generally rated
"F- 1+".
A: Bonds considered to be investment grade and of high credit
quality. The
obligor's ability to pay interest and repay principal is
considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory
credit quality.
The obligor's ability to pay interest and repay principal is
considered to be
adequate. Adverse changes in economic conditions, however, are
more likely to
have adverse impact on these bonds, and therefore impair timely
payment. The
likelihood that the ratings of these bonds will fall below
investment grade is
higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to
pay interest and
repay principal may be affected over time by adverse economic
changes. However,
business and financial alternatives can be identified which
could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in
this class are
currently meeting debt service requirements, the probability of
continued timely
payment of principal and interest reflects the obligor's
limited margin of
safety and the need for reasonable business and economic activity
throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may
lead to default. The ability to meet obligations requires an
advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of
interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or
principal.
PLUS (+) MINUS(-): Plus and minus signs are used with a
rating symbol to
indicate the relative position of a credit within the rating
category. Plus and
minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful
completion of
a project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of
information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures
or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to
furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify
investors of an
occurrence that is likely to result in a rating change and the
likely direction
of such change. These are designated as "Positive",
indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving",
where ratings may
be raised or lowered. FitchAlert is relatively short-term,
and should be
resolved within 12 months.
<PAGE>
APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR
INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and
include bills,
certificates of indebtedness, notes and bonds. Agencies and
instrumentalities of
the U.S. Government are established under the authority of an
act of Congress
and include, but are not limited to, the Tennessee Valley
Authority, the bank
for Cooperatives, the Farmers Home Administration, Federal
Home Loan Banks,
Federal Intermediate Credit Banks and Federal Land Banks, as
well as those
listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS --
are bonds issued
by a cooperatively owned nationwide system of banks and
associations supervised
by the Farm Credit Administration. These bonds are not
guaranteed by the U.S.
Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the
Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing
Administration of
the U.S. Government and are fully and unconditionally
guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities, with
timely payment
guaranteed by the full faith and credit of the U.S. Government,
which represent
a partial ownership interest in a pool of mortgage loans issued
by lenders such
as mortgage bankers, commercial banks and savings and loan
associations. Each
mortgage loan included in the pool is also insured or guaranteed
by the Federal
Housing Administration, the Veterans Administration or the
Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS -- are bonds issued
and guaranteed
by the Federal Home Loan Mortgage Corporation and are not
guaranteed by the U.S.
Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal
Home Loan Bank
System and are not guaranteed by the U.S.Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and
notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued
and guaranteed
by the Federal National Mortgage Association and are not
guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and
notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES -- are debentures
backed by the
Student Loan Marketing Association and are not guaranteed by the
U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and
notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and
GNMA pass-through
certificates, are supported by the full faith and credit of the
U.S. Government;
others, such as securities of FNMA, by the right of the issuer
to borrow from
the U.S. Treasury; still others, such as bonds issued by SLMA,
are supported
only by the credit of the instrumentality. No assurance can be
given that the
U.S. Government will provide financial support to
instrumentalities sponsored by
the U.S. Government as it is not obligated by law, in certain
instances, to do
so.
Although this list includes a description of the primary
types of U.S.
Government agency, authorities or instrumentality obligations in
which the Fund
intends to invest, the Fund may invest in obligations of
U.S. Government
agencies or instrumentalities other than those listed above.
<PAGE>
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), for a
definite period
of time, earn a specified rate of return and are normally
negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit
instruments used to
finance the import, export, transfer or storage of goods.
They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by
corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by
corporations in order
to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P or Fitch and Moody's highest commercial paper
ratings:
The rating "A" is the highest commercial paper rating assigned by
S&P or Fitch,
and issues so rated are regarded as having the greatest
capacity for timely
payment. Issues in the "A" category are delineated with the
numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation
indicates that
the degree of safety regarding timely payment is either
overwhelming or very
strong. Those A-1 issues determined to possess
overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating
assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1
repayment capacity
will normally be evidenced by the following characteristics: (1)
leading market
positions in well established industries; (2) high rates of
return on funds
employed; (3) conservative capitalization structure with
moderate reliance on
debt and ample asset protection; (4) broad margins in earnings
coverage of fixed
financial charges and high internal cash generation; and (5)
well established
access to a range of financial markets and assured sources
of alternate
liquidity.
<PAGE>
THE MFS FAMILY OF FUNDS(R) -- AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below
according to the types
of securities in their portfolios. For free prospectuses
containing more
complete information, including the exchange privilege and
all charges and
expenses, please contact your financial adviser or call the MFS
Service Center
at 1-800-225-2606 any business day from 8 a.m. to 8 p.m.
Eastern time. This
material should be read carefully before investing or sending
money.
<TABLE>
<S> <C>
STOCK LIMITED MATURITY
Massachusetts Investors Trust MFS(R) Government
Limited Maturity Fund
Massachusetts Investors Growth Stock Fund MFS(R) Limited
Maturity Fund
MFS(R) Capital Growth Fund MFS(R) Municipal
Limited Maturity Fund
MFS(R) Emerging Growth Fund
MFS(R) Gold & Natural Resources Fund WORLD
MFS(R) Growth Opportunities Fund MFS(R) World
Asset Allocation Fund
MFS(R) Managed Sectors Fund MFS(R) World
Equity Fund
MFS(R) OTC Fund MFS(R) World
Governments Fund
MFS(R) Research Fund MFS(R) World
Growth Fund
MFS(R) Value Fund MFS(R) World
Total Return Fund
STOCK AND BOND NATIONAL TAX-FREE
BOND
MFS(R) Total Return Fund MFS(R) Municipal
Bond Fund
MFS(R) Utilities Fund MFS(R) Municipal
High Income Fund
(closed to new
investors)
BOND MFS(R) Municipal
Income Fund
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund STATE TAX-FREE
BOND
MFS(R) Government Securities Fund Alabama,
Arkansas, California, Florida,
MFS(R) High Income Fund Georgia,
Louisiana, Maryland, Massachusetts,
MFS(R) Intermediate Income Fund Mississippi, New
York, North Carolina,
MFS(R) Strategic Income Fund Pennsylvania,
South Carolina, Tennessee, Texas,
(formerly MFS(R) Income & Opportunity Fund) Virginia,
Washington, West Virginia
MONEY MARKET
MFS(R) Cash
Reserve Fund
MFS(R) Government
Money Market Fund
MFS(R) Money
Market Fund
</TABLE>
<PAGE>
[MFS Logo]
THE FIRST NAME IN
MUTUAL FUNDS
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000 MFS(R) CAPITAL GROWTH
FUND
Prospectus
Distributor April 1, 1995
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address
P.O. Box 2281
Boston, MA 02107-9906
Independent Accountants
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[MFS Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) CAPITAL GROWTH FUND
500 Boylston Street
Boston, MA 02116
MCG-1-4/95/112.5M 3/203
<PAGE>
MFS CAPITAL GROWTH FUND
(a series of MFS SERIES TRUST II)
Supplement to be affixed to the current
Prospectus for distribution in Iowa
For shares designated as Class B purchased after September 1,
1993, a contingent
deferred sales charge declining from 4% to 0% will be imposed
if the investor
redeems within six years from the date of purchase. In addition,
the Class is
subject to an annual distribution and service fee of 1% of its
average daily net
assets.
The date of this Supplement is April 1, 1995.
<PAGE>
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) CAPITAL STATEMENT
OF
GROWTH FUND
ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) April 1,
1995
- ------------------------------------------------------------------
- --------------
Page
- ----
1. Definitions .................................................
2
2. Investment Techniques .......................................
2
3. Investment Restrictions .....................................
11
4. Management of the Fund ......................................
12
Trustees .................................................
12
Officers .................................................
13
Investment Adviser .......................................
13
Custodian ................................................
14
Shareholder Servicing Agent ..............................
14
Distributor ..............................................
14
5. Portfolio Transactions and Brokerage Commissions ............
15
6. Shareholder Services ........................................
16
Investment and Withdrawal Programs .......................
16
Exchange Privilege .......................................
18
Tax-Deferred Retirement Plans ............................
19
7. Tax Status ..................................................
19
8. Determination of Net Asset Value; Performance Information....
20
9. Distribution Plans ..........................................
22
10. Description of Shares, Voting Rights and Liabilities ........
23
11. Independent Accountants and Financial Statements ............
24
Appendix A ..................................................
25
MFS CAPITAL GROWTH FUND
A Series of MFS Series Trust II
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets
forth information
which may be of interest to investors but which is not
necessarily included in
the Fund's Prospectus, dated April 1, 1995. This SAI
should be read in
conjunction with the Prospectus, a copy of which may be obtained
without charge
by contacting the Shareholder Servicing Agent (see back cover
for address and
phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS Capital Growth Fund, a
diversified series of MFS
Series Trust II, (the
"Trust"), a Massachusetts
business trust. The Fund was
known as MFS Lifetime Capital
Growth Fund until June 3,
1993 and was known as
Lifetime Capital Growth Trust
prior to August 3, 1992. The
Fund became a series of the
Trust on June 3, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus, dated April
1, 1995, of the Fund.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the
Prospectus. In
addition, certain of the Fund's investment policies are
described in greater
detail below.
LENDING OF SECURITIES
The Fund may seek to increase its income by lending portfolio
securities. Such
loans will usually be made only to member banks of the Federal
Reserve System
and to member firms (and subsidiaries thereof) of the New York
Stock Exchange
(the "Exchange") and would be required to be secured continuously
by collateral
in cash, cash equivalents, or U.S. Government 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
usually not exceed
five days). During the existence of a loan, the Fund would
continue to receive
the equivalent of the interest or dividends paid by the issuer on
the securities
loaned and would also receive compensation based on
investment of the
collateral. The Fund would not, however, have the right to vote
any securities
having voting rights during the existence of the loan, but would
call the loan
in anticipation of an important vote to be taken among holders of
the securities
or of the giving or withholding of their consent on a material
matter affecting
the investment. As with other extensions of credit, there are
risks of delay in
recovery or even loss of rights in the collateral should the
borrower fail
financially. However, the loans would be made only to firms
deemed by the
Adviser to be of good standing, and when, in the judgment of the
Adviser, the
consideration which could be earned currently from securities
loans of this type
justifies the attendant risk. If the Adviser determines to
make securities
loans, it is not intended that the value of the securities
loaned would exceed
20% of the value of the Fund's total assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a
"forward delivery"
basis. It is expected that, under normal circumstances, the
Fund will take
delivery of such securities. When the Fund commits to purchase a
security on a
"when-issued" or on a "forward delivery" basis, it will set
up procedures
consistent with the General Statement of Policy of the
Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that
policy currently
recommends that an amount of the Fund's assets equal to the
amount of the
purchase be held aside or segregated to be used to pay for the
commitment, the
Fund will always have cash, short-term money market instruments
or high quality
debt securities sufficient to cover any commitments or to limit
any potential
risk. However, although the Fund does not intend to make such
purchases for
speculative purposes and intends to adhere to policies
promulgated by the SEC,
purchases of securities on such basis may involve more risk than
other types of
purchases. For example, the Fund may have to sell assets which
have been set
aside in order to meet redemptions. Also, if the Fund determines
it is necessary
to sell the "when-issued" or "forward delivery" securities before
delivery, it
may incur a loss because of market fluctuations since the time the
commitment to
purchase such securities was made. When the time comes to pay for
"when-issued"
or "forward delivery" securities, the Fund will meet its
obligations from the
then-available cash flow on the sale of securities, or,
although it would not
normally expect to do so, from the sale of the "when-issued"
or "forward
delivery" securities themselves (which may have a value greater or
less than the
Fund's payment obligation).
CORPORATE ASSET-BACKED SECURITIES
As described in the Prospectus, the Fund may invest in corporate
asset-backed
securities. These securities, issued by trusts and special purpose
corporations,
are backed by a pool of assets, such as credit card and
automobile loan
receivables, representing the obligations of a number of different
parties.
Corporate asset-backed securities present certain risks. For
instance, in the
case of credit card receivables, these securities may not have
the benefit of
any security interest in the related collateral. Credit card
receivables are
generally unsecured and the debtors are entitled to the
protection of a number
of state and federal consumer credit laws, many of which give
such debtors the
right to set off certain amounts owed on the credit cards,
thereby reducing the
balance due. Most issuers of automobile receivables permit the
servicers to
retain possession of the underlying obligations. If the
servicer were to sell
these obligations to another party, there is a risk that the
purchaser would
acquire an interest superior to that of the holders of the
related automobile
receivables. In addition, because of the large number of vehicles
involved in a
typical issuance and technical requirements under state laws,
the trustee for
the holders of the automobile receivables may not have a
proper security
interest in all of the obligations backing such receivables.
Therefore, there is
the possibility that recoveries on repossessed collateral
may not, in some
cases, be available to support payments on these securities.
The underlying
assets (e.g., loans) are also subject to prepayments which
shorten the
securities weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a
pool of assets
representing the obligations of a number of different parties.
To lessen the
effect of failures by obligors on underlying assets to make
payments, the
securities may contain elements of credit support which
fall into two
categories: (i) liquidity protection and (ii) protection
against losses
resulting from ultimate default by an obligor on the
underlying assets.
Liquidity protection refers to the provision of advances,
generally by the
entity administering the pool of assets, to ensure that the
receipt of payments
on the underlying pool occurs in a timely fashion. Protection
against losses
resulting from ultimate default ensures payment through
insurance policies or
letters of credit obtained by the issuer or sponsor from third
parties. The Fund
will not pay any additional or separate fees for credit support.
The degree of
credit support provided for each issue is generally based
on historical
information respecting the level of credit risk associated with
the underlying
assets. Delinquency or loss in excess of that anticipated or
failure of the
credit support could adversely affect the return on an
investment in such a
security.
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund may enter into
repurchase agreements
with sellers who are member firms (or subsidiaries thereof) of
the Exchange,
members of the Federal Reserve System, or recognized primary
U.S. Government
securities dealers or institutions which the Adviser has
determined to be of
comparable creditworthiness. The securities that the Fund
purchases and holds
through its agent are U.S. Government securities, the values,
including accrued
interest, of which are equal to or greater than the repurchase
price agreed to
be paid by the seller. The repurchase price may be higher than
the purchase
price, the difference being income to the Fund, or the purchase
and repurchase
prices may be the same, with interest at a standard rate
due to the Fund
together with the repurchase price on repurchase. In either case,
the income to
the Fund is unrelated to the interest rate on the U.S. Government
securities.
The repurchase agreement provides that in the event the seller
fails to pay the
price agreed upon on the agreed upon delivery date or upon
demand, as the case
may be, the Fund will have the right to liquidate the securities.
If at the time
the Fund is contractually entitled to exercise its right to
liquidate the
securities, the seller is subject to a proceeding under the
bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's
exercise of its
right to liquidate the securities may be delayed and result in
certain losses
and costs to the Fund. The Fund has adopted and follows
procedures which are
intended to minimize the risks of repurchase agreements. For
example, the Fund
only enters into repurchase agreements after the Adviser has
determined that the
seller is creditworthy, and the Adviser monitors the seller's
creditworthiness
on an ongoing basis. Moreover, under such agreements, the
value, including
accrued interest, of the securities (which are marked to market
every business
day) is required to be greater than the repurchase price, and
the Fund has the
right to make margin calls at any time if the value of the
securities falls
below the agreed upon margin.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
As described in the Prospectus, the Fund may purchase loan
participations and
other direct indebtedness. In purchasing a loan participation, the
Fund acquires
some or all of the interest of a bank or other lending
institution in a loan to
a corporate borrower. Many such loans are secured,
although some may be
unsecured. Such loans may be in default at the time of purchase.
Loans and other
direct indebtedness 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 or other direct indebtedness would satisfy
the corporate
borrower's obligation, or that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to
finance internal
growth, mergers, acquisitions, stock repurchases, leveraged buy-
outs and other
corporate activities. Such loans and other direct
indebtedness 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 and other
direct indebtedness may be structured as a novation, pursuant to
which the Fund
would assume all of the rights of the lending institution in a
loan, or as an
assignment, pursuant to which the Fund would purchase an
assignment of a portion
of a lender's interest in a loan or other direct indebtedness
either directly
from the lender or through an intermediary. The Fund may also
purchase trade or
other claims against companies, which generally represent
money owed by the
company to a supplier of goods or services. These claims may
also be purchased
at a time when the company is in default.
Certain of the loan participations and 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 loan participations
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 on to 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
participation for
purposes of certain investment restrictions pertaining to the
diversification of
the Fund's portfolio investments. The highly leveraged nature of
many such loans
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. For example, if a loan or other direct
indebtedness is
foreclosed, the Fund could become part owner of any collateral,
and would bear
the costs and liabilities associated with owning and
disposing of the
collateral. In addition, it is conceivable that under emerging
legal theories of
lender liability, the Fund could be held liable as a co-lender.
It is unclear
whether loans and other forms of direct indebtedness offer
securities law
protections against fraud and misrepresentation. In the absence
of definitive
regulatory guidance, the Fund relies on the Adviser's research in
an attempt to
avoid situations where fraud and misrepresentation could
adversely affect the
Fund. In addition, loan participations and other direct
investments may not be
in the form of securities or may be subject to restrictions on
transfer, and
only limited opportunities may exist to resell such instruments.
As a result,
the Fund may be unable to sell such investments at an opportune
time or may have
to resell them at less than fair market value. To the extent
that the Adviser
determines that any such investments are illiquid, the Fund will
include them in
the investment limitations described below.
FOREIGN SECURITIES
The Fund may invest up to 25% (and generally expects to invest
between 1% and
15%) of its total assets in foreign securities which are not
traded on a U.S.
exchange (not including American Depositary Receipts ("ADRs")).
As discussed in
the Prospectus, investing in foreign securities generally
presents a greater
degree of risk than investing in domestic securities due to
possible exchange
rate fluctuations, less publicly available information, more
volatile markets,
less securities regulation, less favorable tax provisions, war or
expropriation.
As a result of its investments in foreign securities, the
Fund may receive
interest or dividend payments, or the proceeds of the sale or
redemption of such
securities, in the foreign currencies in which such securities
are denominated.
Under certain circumstances, such as where the Adviser
believes that the
applicable exchange rate is unfavorable at the time the
currencies are received
or the Adviser anticipates, for any other reason, that the
exchange rate will
improve, the Fund may hold such currencies for an indefinite
period of time. The
Fund may also hold foreign currency in anticipation of
purchasing foreign
securities. While the holding of currencies will permit
the Fund to take
advantage of favorable movements in the applicable exchange rate,
such strategy
also exposes the Fund to risk of loss if exchange rates move
in a direction
adverse to the Fund's position. Such losses could reduce any
profits or increase
any losses sustained by the Fund from the sale or redemption of
securities and
could reduce the dollar value of interest or dividend payments
received.
AMERICAN DEPOSITARY RECEIPTS
The Fund may invest in ADRs which are certificates issued by a
U.S. depository
(usually a bank) and represent a specified quantity of shares of
an underlying
non-U.S. stock on deposit with a custodian bank as
collateral. ADRs may be
sponsored or unsponsored. A sponsored ADR is issued by a
depository which has an
exclusive relationship with the issuer of the underlying
security. An
unsponsored ADR may be issued by any number of U.S. depositories.
The Fund may
invest in either type of ADR. Although the U.S. investor holds
a substitute
receipt of ownership rather than direct stock certificates,
the use of the
depository receipts in the United States can reduce costs and
delays as well as
potential currency exchange and other difficulties. The Fund
may purchase
securities in local markets and direct delivery of these ordinary
shares to the
local depository of an ADR agent bank in the foreign country.
Simultaneously,
the ADR agents create a certificate which settles at the Fund's
custodian in
five days. The Fund may also execute trades on the U.S. markets
using existing
ADRs. A foreign issuer of the security underlying an ADR is
generally not
subject to the same reporting requirements in the United States
as a domestic
issuer. Accordingly the information available to a U.S. investor
will be limited
to the information the foreign issuer is required to disclose in
its own country
and the market value of an ADR may not reflect undisclosed
material information
concerning the issuer of the underlying security. ADRs may also
be subject to
exchange rate risks if the underlying foreign securities are
traded in foreign
currency.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may
write covered
call and put options and purchase call and put options on
securities. Call and
put options written by the Fund may be covered in the manner set
forth below.
A call option written by the Fund is "covered" if the Fund owns
the security
underlying the call or has an absolute and immediate right to
acquire that
security without additional cash consideration (or for
additional cash
consideration held in a segregated account by its custodian) upon
conversion or
exchange of other securities held in its portfolio. A call
option is also
covered if the Fund holds a call on the same security and in the
same principal
amount as the call written where the exercise price of the
call held (a) is
equal to or less than the exercise price of the call written or
(b) is greater
than the exercise price of the call written if the difference is
maintained by
the Fund in cash, short-term money market instruments or high
quality debt
securities in a segregated account with its custodian. A put
option written by
the Fund is "covered" if the Fund maintains cash, short-term
money market
instruments or high quality debt securities with a value equal
to the exercise
price in a segregated account with its custodian, or else
holds a put on the
same security and in the same principal amount as the put
written where the
exercise price of the put held is equal to or greater than the
exercise price of
the put written or where the exercise price of the put held is
less than the
exercise price of the put written if the difference is maintained
by the Fund in
cash, short-term money market instruments or high quality debt
securities in a
segregated account with its custodian. Put and call options
written by the Fund
may also be covered in such other manner as may be in
accordance with the
requirements of the exchange on which, or the counter party
with which, the
option is traded, and applicable laws and regulations. If
the writer's
obligation is not so covered, it is subject to the risk of the
full change in
value of the underlying security from the time the option is
written until
exercise.
Effecting a closing transaction in the case of a written call
option will permit
the Fund to write another call option on the underlying security
with either a
different exercise price or expiration date or both, or in the
case of a written
put option will permit the Fund to write another put option to
the extent that
the exercise price thereof is secured by deposited cash, short-
term money market
instruments or high quality debt securities. Such transactions
permit the Fund
to generate additional premium income, which will partially
offset declines in
the value of portfolio securities or increases in the cost of
securities to be
acquired. Also, effecting a closing transaction will permit the
cash or proceeds
from the concurrent sale of any securities subject to the option
to be used for
other investments of the Fund, provided that another option on
such security is
not written. If the Fund desires to sell a particular
security from its
portfolio on which it has written a call option, it will
effect a closing
transaction in connection with the option prior to or concurrent
with the sale
of the security.
The Fund will realize a profit from a closing transaction if the
premium paid in
connection with the closing of an option written by the Fund is
less than the
premium received from writing the option, or if the premium
received in
connection with the closing of an option purchased by the Fund is
more than the
premium paid for the original purchase. Conversely, the Fund will
suffer a loss
if the premium paid or received in connection with a closing
transaction is more
or less, respectively, than the premium received or paid in
establishing the
option position. Because increases in the market price of a
call option will
generally reflect increases in the market price of the underlying
security, any
loss resulting from the repurchase of a call option previously
written by the
Fund is likely to be offset in whole or in part by
appreciation of the
underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that
is, the Fund may purchase a security and then write a call option
against that
security. The exercise price of the call the Fund determines
to write will
depend upon the expected price movement of the underlying
security. The exercise
price of a call option may be below ("in-the-money"), equal to
("at- the-money")
or above ("out-of-the-money") the current value of the
underlying security at
the time the option is written. Buy-and-write transactions
using in-the-money
call options may be used when it is expected that the price of
the underlying
security will decline moderately during the option period.
Buy- and-write
transactions using out-of-the-money call options may be used when
it is expected
that the premiums received from writing the call option plus the
appreciation in
the market price of the underlying security up to the exercise
price will be
greater than the appreciation in the price of the underlying
security alone. If
the call options are exercised in such transactions, the Fund's
maximum gain
will be the premium received by it for writing the option,
adjusted upwards or
downwards by the difference between the Fund's purchase price
of the security
and the exercise price, less related transaction costs. If the
options are not
exercised and the price of the underlying security declines, the
amount of such
decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms
of risk/return
characteristics to buy-and-write transactions. If the market
price of the
underlying security rises or otherwise is above the exercise
price, the put
option will expire worthless and the Fund's gain will be limited
to the premium
received, less related transaction costs. If the market price of
the underlying
security declines or otherwise is below the exercise price, the
Fund may elect
to close the position or retain the option until it is exercised,
at which time
the Fund will be required to take delivery of the security at
the exercise
price; the Fund's return will be the premium received from the
put option minus
the amount by which the market price of the security is below
the exercise
price, which could result in a loss. Out-of-the-money, at-
the-money and
in-the-money put options may be used by the Fund in the same
market environments
that call options are used in equivalent buy-and-write
transactions.
The Fund may also write combinations of put and call
options on the same
security, known as "straddles," with the same exercise price
and expiration
date. By writing a straddle, the Fund undertakes a simultaneous
obligation to
sell and purchase the same security in the event that one of
the options is
exercised. If the price of the security subsequently rises
sufficiently above
the exercise price to cover the amount of the premium and
transaction costs, the
call will likely be exercised and the Fund will be
required to sell the
underlying security at a below market price. This loss may be
offset, however,
in whole or part, by the premiums received on the writing of
the two options.
Conversely, if the price of the security declines by a sufficient
amount, the
put will likely be exercised. The writing of straddles will likely
be effective,
therefore, only where the price of the security remains stable
and neither the
call nor the put is exercised. In those instances where one of
the options is
exercised, the loss on the purchase or sale of the underlying
security may
exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to
profit from any
increase in the market value of the underlying security above the
exercise price
of the option. By writing a put option, the Fund assumes the risk
that it may be
required to purchase the underlying security for an exercise
price above its
then current market value, resulting in a capital loss
unless the security
subsequently appreciates in value. The writing of options on
securities will not
be undertaken by the Fund solely for hedging purposes, and could
involve certain
risks which are not present in the case of hedging transactions.
Moreover, even
where options are written for hedging purposes, such
transactions constitute
only a partial hedge against declines in the value of portfolio
securities or
against increases in the value of securities to be acquired, up to
the amount of
the premium.
The Fund may purchase options for hedging purposes or to
increase its return.
Put options may be purchased to hedge against a decline in
the value of
portfolio securities. If such decline occurs, the put options
will permit the
Fund to sell the securities at the exercise price, or to close
out the options
at a profit. By using put options in this way, the Fund will
reduce any profit
it might otherwise have realized in the underlying security by the
amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase
in the price of
securities that the Fund anticipates purchasing in the future. If
such increase
occurs, the call option will permit the Fund to purchase the
securities at the
exercise price, or to close out the options at a profit. The
premium paid for
the call option plus any transaction costs will reduce the
benefit, if any,
realized by the Fund upon exercise of the option, and, unless
the price of the
underlying security rises sufficiently, the option may expire
worthless to the
Fund.
In certain instances, the Fund may enter into options on
U.S. Treasury
securities which provide for periodic adjustment of the strike
price and may
also provide for the periodic adjustment of the premium during
the term of each
such option. Like other types of options, these transactions,
which may be
referred to as "reset" options or "adjustable strike"
options, grant the
purchaser the right to purchase (in the case of a "call") or
sell (in the case
of a "put"), a specified type and series of U.S. Treasury
security at any time
up to a stated expiration date (or, in certain instances, on
such date). In
contrast to other types of options, however, the price at which
the underlying
security may be purchased or sold under a "reset" option is
determined at
various intervals during the term of the option, and such price
fluctuates from
interval to interval based on changes in the market value of
the underlying
security. As a result, the strike price of a "reset" option,
at the time of
exercise, may be less advantageous to the Fund than if the strike
price had been
fixed at the initiation of the option. In addition, the
premium paid for the
purchase of the option may be determined at the termination,
rather than the
initiation, of the option. If the premium is paid at
termination, the Fund
assumes the risk that (i) the premium may be less than the
premium which would
otherwise have been received at the initiation of the option
because of such
factors as the volatility in yield of the underlying Treasury
security over the
term of the option and adjustments made to the strike price of
the option, and
(ii) the option purchaser may default on its obligation to pay
the premium at
the termination of the option.
OPTIONS ON STOCK INDICES -- As noted in the Prospectus, the
Fund may write
(sell) covered call and put options and purchase call and put
options on stock
indices. In contrast to an option on a security, an option on
a stock index
provides the holder with the right but not the obligation to
make or receive a
cash settlement upon exercise of the option, rather than the
right to purchase
or sell a security. The amount of this settlement is equal to (i)
the amount, if
any, by which the fixed exercise price of the option exceeds (in
the case of a
call) or is below (in the case of a put) the closing value of
the underlying
index on the date of exercise, multiplied by (ii) a fixed "index
multiplier."
The Fund may cover call options on stock indices by owning
securities whose
price changes, in the opinion of the Adviser, are expected to
be similar to
those of the underlying index, or by having an absolute and
immediate right to
acquire such securities without additional cash consideration (or
for additional
cash consideration held in a segregated account by its
custodian) upon
conversion or exchange of other securities in its portfolio.
Where the Fund
covers a call option on a stock index through ownership of
securities, such
securities may not match the composition of the index and, in
that event, the
Fund will not be fully covered and could be subject to risk of
loss in the event
of adverse changes in the value of the index. The Fund may
also cover call
options on stock indices by holding a call on the same index
and in the same
principal amount as the call written where the exercise price of
the call held
(a) is equal to or less than the exercise price of the call
written or (b) is
greater than the exercise price of the call written if the
difference is
maintained by the Fund in cash, short-term money market
instruments or high
quality debt securities in a segregated account with its
custodian. The Fund may
cover put options on stock indices by maintaining cash, short-
term money market
instruments or high quality debt securities with a value equal
to the exercise
price in a segregated account with its custodian, or by
holding a put on the
same stock index and in the same principal amount as the put
written where the
exercise price of the put held is equal to or greater than the
exercise price of
the put written or where the exercise price of the put held is
less than the
exercise price of the put written if the difference is maintained
by the Fund in
cash, short-term money market instruments or high quality debt
securities in a
segregated account with its custodian. Put and call options on
stock indices may
also be covered in such other manner as may be in accordance
with the rules of
the exchange on which, or the counterparty with which, the option
is traded and
applicable laws and regulations.
The Fund will receive a premium from writing a put or call
option, which
increases the Fund's gross income in the event the option expires
unexercised or
is closed out at a profit. If the value of an index on which
the Fund has
written a call option falls or remains the same, the Fund will
realize a profit
in the form of the premium received (less transaction costs)
that could offset
all or a portion of any decline in the value of the securities
it owns. If the
value of the index rises, however, the Fund will realize a
loss in its call
option position, which will reduce the benefit of any unrealized
appreciation in
the Fund's stock investments. By writing a put option, the Fund
assumes the risk
of a decline in the index. To the extent that the price changes
of securities
owned by the Fund correlate with changes in the value of the
index, writing
covered put options on indices will increase the Fund's losses in
the event of a
market decline, although such losses will be offset in part
by the premium
received for writing the option.
The Fund may also purchase put options on stock indices to hedge
its investments
against a decline in value. By purchasing a put option on a
stock index, the
Fund will seek to offset a decline in the value of securities it
owns through
appreciation of the put option. If the value of the Fund's
investments does not
decline as anticipated, or if the value of the option does not
increase, the
Fund's loss will be limited to the premium paid for the option
plus related
transaction costs. The success of this strategy will largely
depend on the
accuracy of the correlation between the changes in value of the
index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the
Fund to attempt
to reduce the risk of missing a broad market advance, or an
advance in an
industry or market segment, at a time when the Fund holds
uninvested cash or
short-term debt securities awaiting investment. When purchasing
call options for
this purpose, the Fund will also bear the risk of losing all or a
portion of the
premium paid if the value of the index does not rise. The
purchase of call
options on stock indices when the Fund is substantially fully
invested is a form
of leverage, up to the amount of the premium and related
transaction costs, and
involves risks of loss and of increased volatility similar to
those involved in
purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based"
index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index,
the changes in value of which ordinarily will reflect
movements in the stock
market in general. In contrast, certain options may be based on
narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of
securities of
particular industry groups, such as those of oil and gas
or technology
companies. A stock index assigns relative values to the stocks
included in the
index and the index fluctuates with changes in the market values
of the stocks
so included. The composition of the index is changed periodically.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may
enter into stock
index futures contracts. (Unless otherwise specified, futures
contracts on
indices are referred to as "Futures Contracts.") Such investment
strategies will
be used for hedging purposes and for non-hedging purposes, subject
to applicable
law.
A Futures Contract is a bilateral agreement providing for the
purchase and sale
of a specified type and amount of a financial instrument, or for
the making and
acceptance of a cash settlement, at a stated time in the
future for a fixed
price. By its terms, a Futures Contract provides for a specified
settlement date
on which, in the case of stock index futures contracts, the
difference between
the price at which the contract was entered into and the
contract's closing
value is settled between the purchaser and seller in cash.
Futures Contracts
differ from options in that they are bilateral agreements,
with both the
purchaser and the seller equally obligated to complete the
transaction. Futures
Contracts call for settlement only on the expiration date
and cannot be
"exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the
purchase or sale of
a security or the purchase of an option in that no purchase
price is paid or
received. Instead, an amount of cash or cash equivalents, which
varies but may
be as low as 5% or less of the value of the contract, must be
deposited with the
broker as "initial margin." Subsequent payments to and from the
broker, referred
to as "variation margin," are made on a daily basis as the value
of the index or
instrument underlying the Futures Contract fluctuates, making
positions in the
Futures Contract more or less valuable -- a process known as
"marking to the
market."
Purchases or sales of stock index futures contracts are used
to attempt to
protect the Fund's current or intended stock investments from
broad fluctuations
in stock prices. For example, the Fund may sell stock index
futures contracts in
anticipation of or during a market decline to attempt to offset
the decrease in
market value of the Fund's securities portfolio that might
otherwise result. If
such decline occurs, the loss in value of portfolio securities may
be offset, in
whole or part, by gains on the futures position. When the Fund
is not fully
invested in the securities market and anticipates a significant
market advance,
it may purchase stock index futures contracts in order to
gain 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.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus,
the Fund may
purchase and write options to buy or sell Futures Contracts
in which it may
invest ("Options on Futures Contracts"). Such investment
strategies will be used
for hedging purposes and for non-hedging purposes, subject to
applicable law.
An Option on a Futures Contract provides the holder with the right
to enter into
a "long" position in the underlying Futures Contract, in the
case of a call
option, or a "short" position in the underlying Futures Contract,
in the case of
a put option, at a fixed exercise price up to a stated
expiration date or, in
the case of certain options, on such date. Upon exercise of the
option by the
holder, the contract market clearinghouse establishes a
corresponding short
position for the writer of the option, in the case of a call
option, or a
corresponding long position in the case of a put option. In the
event that an
option is exercised, the parties will be subject to all the
risks associated
with the trading of Futures Contracts, such as payment of initial
and variation
margin deposits. In addition, the writer of an Option on a
Futures Contract,
unlike the holder, is subject to initial and variation margin
requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by
the purchaser
or seller prior to expiration by effecting a closing
purchase or sale
transaction, subject to the availability of a liquid secondary
market, which is
the purchase or sale of an option of the same series (i.e., the
same exercise
price and expiration date) as the option previously purchased
or sold. The
difference between the premiums paid and received represents the
trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by
the Fund on U.S.
exchanges are traded on the same contract market as the
underlying Futures
Contract, and, like Futures Contracts, are subject to regulation
by the CFTC and
the performance guarantee of the exchange clearinghouse. In
addition, Options on
Futures Contracts may be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures
Contracts (a) through
purchases of the underlying Futures Contract, (b) through
ownership of the
instrument, or instruments included in the index, underlying
the Futures
Contract, or (c) through the holding of a call on the same
Futures Contract and
in the same principal amount as the call written where the
exercise price of the
call held (i) is equal to or less than the exercise price of the
call written or
(ii) is greater than the exercise price of the call written if the
difference is
maintained by the Fund in cash or securities in a segregated
account with its
custodian. The Fund may cover the writing of put Options on
Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through
segregation of
cash, short-term money market instruments or high quality debt
securities in an
amount equal to the value of the security or index underlying
the Futures
Contract, or (c) through the holding of a put on the same Futures
Contract and
in the same principal amount as the put written where the
exercise price of the
put held is equal to or greater than the exercise price of the
put written or
where the exercise price of the put held is less than the
exercise price of the
put written if the difference is maintained by the Fund in
cash, short-term
money market instruments or high quality debt securities in a
segregated account
with its custodian. Put and call Options on Futures
Contracts may also be
covered in such other manner as may be in accordance with
the rules of the
exchange on which the option is traded and applicable laws and
regulations. Upon
the exercise of a call Option on a Futures Contract written by
the Fund, the
Fund will be required to sell the underlying Futures Contract
which, if the Fund
has covered its obligation through the purchase of such Contract,
will serve to
liquidate its futures position. Similarly, where a put
Option on a Futures
Contract written by the Fund is exercised, the Fund will be
required to purchase
the underlying Futures Contract which, if the Fund has covered
its obligation
through the sale of such Contract, will close out its futures
position.
The writing of a call Option on a Futures Contract for
hedging purposes
constitutes a partial hedge against declining prices of the
securities or other
instruments required to be delivered under the terms of the
Futures Contract. If
the futures price at expiration of the option is below the
exercise price, the
Fund will retain the full amount of the option premium, less
related transaction
costs, which provides a partial hedge against any decline that may
have occurred
in the Fund's portfolio holdings. The writing of a put
Option on a Futures
Contract constitutes a partial hedge against increasing prices of
the securities
or other instruments required to be delivered under the terms
of the Futures
Contract. If the futures price at expiration of the option is
higher than the
exercise price, the Fund will retain the full amount of the option
premium which
provides a partial hedge against any increase in the price of
securities which
the Fund intends to purchase. If a put or call option the Fund
has written is
exercised, the Fund will incur a loss which will be reduced by the
amount of the
premium it receives. Depending on the degree of correlation
between changes in
the value of its portfolio securities and the changes in the
value of its
futures positions, the Fund's losses from existing Options on
Futures Contracts
may to some extent be reduced or increased by changes in the
value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging
purposes instead
of purchasing or selling the underlying Futures Contracts. For
example, where a
decrease in the value of portfolio securities is anticipated as
a result of a
projected market-wide decline or changes in interest or exchange
rates, the Fund
could, in lieu of selling Futures Contracts, purchase put
options thereon. In
the event that such decrease occurs, it may be offset, in whole
or part, by a
profit on the option. Conversely, where it is projected that
the value of
securities to be acquired by the Fund will increase prior to
acquisition, due to
a market advance or changes in interest or exchange rates,
the Fund could
purchase call Options on Futures Contracts, rather than
purchasing the
underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward
foreign currency
exchange contracts ("Forward Contracts") for hedging purposes
and non-hedging
purposes. Forward Contracts may be used for hedging to attempt
to minimize the
risk to the Fund from adverse changes in the relationship
between the U.S.
dollar and foreign currencies. The Fund intends to enter into
Forward Contracts
for hedging purposes. In particular, 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. The Fund also may
enter into a
Forward Contract in order to assure itself of a predetermined
exchange rate in
connection with a security denominated in a foreign currency. In
addition, the
Fund may enter into Forward Contracts for "cross hedging"
purposes; e.g., the
purchase or sale of a Forward Contract on one type of
currency as a hedge
against adverse fluctuations in the value of a second type of
currency.
If a hedging transaction in Forward Contracts is successful, the
decline in the
value of portfolio securities or other assets or the increase
in the cost of
securities or other assets to be acquired may be offset, at
least in part, by
profits on the Forward Contract. Nevertheless, by entering
into such Forward
Contracts, the Fund may be required to forego all or a portion of
the benefits
which otherwise could have been obtained from favorable
movements in exchange
rates. But, the Fund will usually seek to close out positions in
such Contracts
by entering into offsetting transactions, which will serve to
fix the Fund's
profit or loss based upon the value of the contracts at the time
the offsetting
transaction is executed.
The Fund will also enter into transactions in Forward Contracts
for other than
hedging purposes, which present greater profit potential
but also involve
increased risk. For example, the Fund may purchase a given
foreign currency
through a Forward Contract if, in the judgment of the Adviser, the
value of such
currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund
may sell the currency through a Forward Contract if the Adviser
believes that
its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign
currency exchange
rates occurs, which will increase its gross income. Where
exchange rates do not
move in the direction or to the extent anticipated, however,
the Fund may
sustain losses which will reduce its gross income. Such
transactions, therefore,
could be considered speculative and could involve significant risk
of loss.
The Fund has established procedures consistent with statements
by the SEC and
its staff regarding the use of Forward Contracts by
registered investment
companies, which require the use of segregated assets or "cover"
in connection
with the purchase and sale of such Contracts. In those
instances in which the
Fund satisfies this requirement through segregation of assets, it
will maintain,
in a segregated account, cash, cash equivalents or high-quality
debt securities,
which will be marked to market on a daily basis, in an amount
equal to the value
of its commitments under Forward Contracts. While these
Contracts are not
presently regulated by the CFTC, the CFTC may in the future
assert authority to
regulate Forward Contracts. In such event, the Fund's ability to
utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES
As noted in the Prospectus, the Fund may purchase and write
options on foreign
currencies for hedging purposes in a manner similar to that in
which Forward
Contracts will be utilized. For example, a decline in the
dollar value of a
foreign currency in which portfolio securities are denominated
will reduce the
dollar value of such securities, even if their value in the
foreign currency
remains constant. In order to protect against such diminutions
in the value of
portfolio securities, the Fund may purchase put options on the
foreign currency.
If the value of the currency does decline, the Fund will have the
right to sell
such currency for a fixed amount in dollars and will thereby
offset, in whole or
in part, the adverse effect on its portfolio which
otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in
which securities
to be acquired are denominated is projected, thereby increasing
the cost of such
securities, the Fund may purchase call options thereon. The
purchase of such
options could offset, at least partially, the effects of the
adverse movements
in exchange rates. As in the case of other types of options,
however, the
benefit to the Fund deriving from purchases of foreign currency
options will be
reduced by the amount of the premium and related transaction
costs. In addition,
where currency exchange rates do not move in the direction or
to the extent
anticipated, the Fund could sustain losses on transactions in
foreign currency
options which would require it to 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.
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.
RISK FACTORS IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE
FUND'S PORTFOLIO.
The Fund's ability effectively to hedge all or a portion of
its portfolio
through transactions in options, Futures Contracts,
Options on Futures
Contracts, Forward Contracts and options on foreign currencies
depends on the
degree to which price movements in the underlying index or
instrument correlate
with price movements in the relevant portion of the Fund's
portfolio. In the
case of futures and options based on an index, the portfolio will
not duplicate
the components of the index, and in the case of futures and
options on fixed
income securities, the portfolio securities which are being
hedged may not be
the same type of obligation underlying such contract. The
use of Forward
Contracts for "cross hedging" purposes may involve greater
correlation risks. As
a result, the correlation probably will not be exact.
Consequently, the Fund
bears the risk that the price of the portfolio securities being
hedged will not
move in the same amount or direction as the underlying index or
obligation.
For example, if the Fund purchases a put option on an index
and the index
decreases less than the value of the hedged securities,
the Fund would
experience a loss which is not completely offset by the put
option. It is also
possible that there may be a negative correlation between
the index or
obligation underlying an option or Futures Contract in which
the Fund has a
position and the portfolio securities the Fund is attempting to
hedge, which
could result in a loss on both the portfolio and the hedging
instrument. In
addition, the Fund may enter into transactions in Forward
Contracts or options
on foreign currencies in order to hedge against exposure
arising from the
currencies underlying such forwards. In such instances, the Fund
will be subject
to the additional risk of imperfect correlation between changes
in the value of
the currencies underlying such forwards or options and changes
in the value of
the currencies being hedged.
It should be noted that stock index futures contracts or options
based upon a
narrower index of securities, such as those of a particular
industry group, may
present greater risk than options or futures based on a broad
market index. This
is due to the fact that a narrower index is more susceptible
to rapid and
extreme fluctuations as a result of changes in the value of a
small number of
securities. Nevertheless, where the Fund enters into transactions
in options or
futures on narrow-based indices for hedging purposes, movements
in the value of
the index should, if the hedge is successful, correlate closely
with the portion
of the Fund's portfolio or the intended acquisitions being hedged.
The trading of Futures Contracts, options and Forward
Contracts for hedging
purposes entails the additional risk of imperfect correlation
between movements
in the futures or option price and the price of the
underlying index or
obligation. The anticipated spread between the prices may be
distorted due to
the differences in the nature of the markets, such as
differences in margin
requirements, the liquidity of such markets and the participation
of speculators
in the options, futures and forward markets. In this
regard, trading by
speculators in options, futures and Forward Contracts has
in the past
occasionally resulted in market distortions, which may be
difficult or
impossible to predict, particularly near the expiration of such
contracts.
The trading of Options on Futures Contracts also entails the
risk that changes
in the value of the underlying Futures Contract will not be
fully reflected in
the value of the option. The risk of imperfect correlation,
however, generally
tends to diminish as the maturity date of the Futures Contract
or expiration
date of the option approaches.
Further, with respect to options on securities, options on
stock 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.
It should also be noted that the Fund may enter into transactions
into options
(except for options on foreign currencies), Futures
Contracts, Options on
Futures Contracts and Forward Contracts not only for hedging
purposes, but also
for non-hedging purposes intended to increase portfolio returns.
Non- hedging
transactions in such investments involve greater risks and may
result in losses
which may not be offset by increases in the value of portfolio
securities or
declines in the cost of securities to be acquired. The Fund
will only write
covered options, such that cash or securities necessary to
satisfy an option
exercise will be segregated at all times, unless the option is
covered in such
other manner as may be in accordance with the rules of the
exchange on which the
option is traded and applicable laws and regulations.
Nevertheless, the method
of covering an option employed by the Fund may not fully protect
it against risk
of loss and, in any event, the Fund could suffer losses on the
option position
which might not be offset by corresponding portfolio gains.
The Fund also may enter into transactions in Futures
Contracts, Options on
Futures Contracts, Options on Foreign Currency, and Forward
Contracts for other
than hedging purposes, which could expose the Fund to
significant risk of loss
if foreign currency exchange rates, market prices or interest
rates do not move
in the direction or to the extent anticipated. In this
regard, the foreign
currency may be extremely volatile from time to time, as
discussed in the
Prospectus and in this SAI, and the use of such transactions
for non- hedging
purposes could therefore involve significant risk of loss.
With respect to the writing of straddles on securities, the Fund
incurs the risk
that the price of the underlying security will not remain
stable, that one of
the options written will be exercised and that the resulting
loss will not be
offset by the amount of the premiums received. Such
transactions, therefore,
create an opportunity for increased return by providing the
Fund with two
simultaneous premiums on the same security, but involve
additional risk, since
the Fund may have an option exercised against it regardless of
whether the price
of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior
to exercise or
expiration, a futures or option position can only be terminated by
entering into
a closing purchase or sale transaction. This requires a
secondary market for
such instruments on the exchange on which the initial
transaction was entered
into. While the Fund will enter into options or futures positions
only if there
appears to be a liquid secondary market therefor, there can be no
assurance that
such a market will exist for any particular contracts at any
specific time. In
that event, it may not be possible to close out a position held by
the Fund, and
the Fund could be required to purchase or sell the instrument
underlying an
option, make or receive a cash settlement or meet ongoing
variation margin
requirements. Under such circumstances, if the Fund has
insufficient cash
available to meet margin requirements, it will be necessary
to liquidate
portfolio securities or other assets at a time when it is
disadvantageous to do
so. The inability to close out options and futures positions,
therefore, could
have an adverse impact on the Fund's ability effectively to hedge
its portfolio,
and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or
option thereon may
be adversely affected by "daily price fluctuation limits,"
established by
exchanges, which limit the amount of fluctuation in the price
of a contract
during a single trading day. Once the daily limit has been
reached in the
Contract, no trades may be entered into at a price beyond the
limit, thus
preventing the liquidation of open futures or option positions
and requiring
traders to make additional margin deposits. Prices have in the
past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject
to the risk of
trading halts, suspensions, exchange or clearinghouse
equipment failures,
government intervention, insolvency of a brokerage firm or
clearinghouse or
other disruptions of normal trading activity, which could at
times make it
difficult or impossible to liquidate existing positions or to
recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the
opening of a
futures or forward position and the writing of an option, such
transactions
involve substantial leverage. As a result, relatively small
movements in the
price of the contract can result in substantial unrealized
gains or losses.
Where the Fund enters into such transactions for hedging
purposes, any losses
incurred in connection therewith should, if the hedging strategy
is successful,
be offset, in whole or in part, by increases in the value of
securities or other
assets held by the Fund or decreases in the prices of securities
or other assets
the Fund intends to acquire. Where the Fund enters into such
transactions for
other than hedging purposes, the margin requirements
associated with such
transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures
and options are
traded may impose limitations governing the maximum number of
positions on the
same side of the market and involving the same underlying
instrument which may
be held by a single investor, whether acting alone or in
concert with others
(regardless of whether such contracts are held on the same
or different
exchanges or held or written in one or more accounts or
through one or more
brokers). Further, the CFTC and the various contract markets
have established
limits referred to as "speculative position limits" on the
maximum net long or
net short position which any person may hold or control in a
particular futures
or option contract. An exchange may order the liquidation of
positions found to
be in violation of these limits and it may impose other
sanctions or
restrictions. The Adviser does not believe that these trading
and position
limits will have any adverse impact on the strategies for hedging
the portfolio
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the
Fund assumes when
it purchases an Option on a Futures Contract is the premium paid
for the option,
plus related transaction costs. In order to profit from an
option purchased,
however, it may be necessary to exercise the option and to
liquidate the
underlying Futures Contract, subject to the risks of the
availability of a
liquid offset market described herein. The writer of an
Option on a Futures
Contract is subject to the risks of commodity futures trading,
including the
requirement of initial and variation margin payments, as well as
the additional
risk that movements in the price of the option may not correlate
with movements
in the price of the underlying security, index, currency or
Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND
TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward
Contracts on foreign
currencies, as well as futures and options on foreign
currencies and
transactions executed on foreign exchanges, are subject to
all of the
correlation, liquidity and other risks outlined above. In
addition, however,
such transactions are subject to the risk of governmental
actions affecting
trading in or the prices of currencies underlying such
contracts, which could
restrict or eliminate trading and could have a substantial adverse
effect on the
value of positions held by the Fund. Further, the value of such
positions could
be adversely affected by a number of other complex political
and economic
factors applicable to the countries issuing the underlying
currencies.
Further, unlike trading in most other types of instruments,
there is no
systematic reporting of last sale information with respect
to the foreign
currencies underlying contracts thereon. As a result, the
available information
on which trading systems will be based may not be as complete as
the comparable
data on which the Fund makes investment and trading decisions in
connection with
other transactions. Moreover, because the foreign currency
market is a global,
24-hour market, events could occur in that market which will not
be reflected in
the forward, futures or options markets until the following day,
thereby making
it more difficult for the Fund to respond to such events in a
timely manner.
Settlements of exercises of over-the-counter Forward
Contracts or foreign
currency options generally must occur within the country issuing
the underlying
currency, which in turn requires traders to accept or make
delivery of such
currencies in conformity with any U.S. or foreign restrictions
and regulations
regarding the maintenance of foreign banking relationships, fees,
taxes or other
charges.
Unlike transactions entered into by the Fund in Futures
Contracts and
exchange-traded options, options on foreign currencies, Forward
Contracts and
over-the-counter options on securities are not traded on
contract markets
regulated by the CFTC or (with the exception of certain
foreign currency
options) the SEC. To the contrary, such instruments are traded
through financial
institutions acting as market-makers, although foreign currency
options are also
traded on certain national securities exchanges, such as the
Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC
regulation. In
an over-the-counter trading environment, many of the
protections afforded to
exchange participants will not be available. For example,
there are no daily
price fluctuation limits, and adverse market movements could
therefore continue
to an unlimited extent over a period of time. Although the
purchaser of an
option cannot lose more than the amount of the premium plus
related transaction
costs, this entire amount could be lost. Moreover, the option
writer and a
trader of Forward Contracts could lose amounts substantially in
excess of their
initial investments, due to the margin and collateral
requirements associated
with such positions.
In addition, over-the-counter transactions can only be
entered into with a
financial institution willing to take the opposite side, as
principal, of the
Fund's position unless the institution acts as broker and
is able to find
another counterparty willing to enter into the transaction with
the Fund. Where
no such counterparty is available, it will not be possible
to enter into a
desired transaction. There also may be no liquid secondary market
in the trading
of over-the-counter contracts, and the Fund could be required to
retain options
purchased or written, or Forward Contracts entered into,
until exercise,
expiration or maturity. This in turn could limit the Fund's
ability to profit
from open positions or to reduce losses experienced, and could
result in greater
losses.
Further, over-the-counter transactions are not subject to the
guarantee of an
exchange clearinghouse, and the Fund will therefore be subject
to the risk of
default by, or the bankruptcy of, the financial institution
serving as its
counterparty. One or more of such institutions also may decide
to discontinue
their role as market-makers in a particular currency or
security, thereby
restricting the Fund's ability to enter into desired hedging
transactions. The
Fund will enter into an over-the-counter transaction only with
parties whose
creditworthiness has been reviewed and found satisfactory by the
Adviser.
Options on securities, options on stock indexes, Futures
Contracts, Options on
Futures Contracts and options on foreign currencies may be
traded on exchanges
located in foreign countries. Such transactions may not be
conducted in the same
manner as those entered into on U.S. exchanges, and may be
subject to different
margin, exercise, settlement or expiration procedures. As a
result, many of the
risks of over-the-counter trading may be present in
connection with such
transactions.
Options on foreign currencies traded on national securities
exchanges are within
the jurisdiction of the SEC, as are other securities traded on
such exchanges.
As a result, many of the protections provided to traders on
organized exchanges
will be available with respect to such transactions. In
particular, all foreign
currency option positions entered into on a national securities
exchange are
cleared and guaranteed by the Options Clearing Corporation (the
"OCC"), thereby
reducing the risk of counterparty default. Further, a liquid
secondary market in
options traded on a national securities exchange may be more
readily available
than in the over-the-counter market, potentially permitting
the Fund to
liquidate open positions at a profit prior to exercise or
expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency
options, however, is
subject to the risks of the availability of a liquid secondary
market described
above, as well as the risks regarding adverse market movements,
margining of
options written, the nature of the foreign currency
market, possible
intervention by governmental authorities and the effects of other
political and
economic events. In addition, exchange-traded options on
foreign currencies
involve certain risks not presented by the over-the-counter
market. For example,
exercise and settlement of such options must be made
exclusively through the
OCC, which has established banking relationships in applicable
foreign countries
for this purpose. As a result, the OCC may, if it determines
that foreign
governmental restrictions or taxes would prevent the orderly
settlement of
foreign currency option exercises, or would result in undue
burdens on the OCC
or its clearing member, impose special procedures on exercise
and settlement,
such as technical changes in the mechanics of delivery of
currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES
CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool"
for purposes of
the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter
into transactions in Futures Contracts and Options on Futures
Contracts only (i)
for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin
and premiums on
such non-hedging positions does not exceed 5% of the liquidation
value of the
Fund's assets. In addition, the Fund must comply with the
requirements of
various state securities laws in connection with such
transactions.
The Fund has adopted the additional restriction that it will
not enter into a
Futures Contract if, immediately thereafter, the value of
securities and other
obligations underlying all such Futures Contracts would exceed
50% of the value
of the Fund's total assets. Moreover, the Fund will not
purchase put and call
options if as a result more than 5% of its total assets would
be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash or
securities will
be deposited in a segregated account with the Fund's
custodian so that the
amount so segregated will at all times equal the value of the
Futures Contract,
thereby insuring that the use of such futures is unleveraged.
The staff of the SEC has taken the position that purchased
over-the-counter
options and assets used to cover written over-the-counter
options are illiquid
and, therefore, together with other illiquid securities held by
a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling").
Although the
Adviser disagrees with this position, the Adviser intends to
limit the Fund's
writing of over-the-counter options in accordance with the
following procedure.
Except as provided below, the Fund intends to write over-the-
counter options
only with primary U.S. Government securities dealers recognized
as such by the
Federal Reserve Bank of New York. Also, the contracts the Fund has
in place with
such primary dealers provide that the Fund has the absolute right
to repurchase
an option it writes at any time at a price which represents
the fair market
value, as determined in good faith through negotiation between the
parties, but
which in no event will exceed a price determined pursuant to a
formula in the
contract. Although the specific formula may vary between
contracts with
different primary dealers, the formula generally is based on a
multiple of the
premium received by the Fund for writing the option, plus the
amount, if any of
the option's intrinsic value (i.e., the amount that the option is
in-the-money).
The formula may also include a factor to account for the
difference between the
price of the security and the strike price of the option if
the option is
written out-of- the-money. The Fund will treat all or a portion
of the formula
as illiquid for purposes of the SEC illiquidity ceiling test
imposed by the SEC
staff. The Fund may also write over-the-counter options
with non-primary
dealers, including foreign dealers (where applicable), and will
treat the assets
used to cover these options as illiquid for purposes of such
SEC illiquidity
ceiling test.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be
changed without
the approval of the holders of a majority of the Fund's shares
(which, as used
in this SAI, means the lesser of (i) more than 50% of the
outstanding shares of
the Trust or a series or class, as applicable, or (ii) 67%
or more of the
outstanding shares of the Trust or a series or class, as
applicable, present at
a meeting if holders of more than 50% of the outstanding shares
of the Trust or
a series or class, as applicable, are represented in person or by
proxy). Except
for Investment Restriction (1), these investment restrictions
and policies are
adhered to at the time of purchase or utilization of assets; a
subsequent change
in circumstances will not be considered to result in a violation
of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its
total assets, and
then only as a temporary measure for extraordinary or emergency
purposes, or
pledge, mortgage or hypothecate an amount of its assets
(taken at market
value) in excess of 15% of its total assets, in each case
taken at the lower
of cost or market value. For the purpose of this
restriction, collateral
arrangements with respect to options, Futures Contracts,
Options on Futures
Contracts, Forward Contracts and options on foreign currencies,
and payments
of initial and variation margin in connection therewith, are
not considered a
pledge of assets.
(2) Underwrite securities issued by other persons except
insofar as the Fund
may technically be deemed an underwriter under the Securities
Act of 1933 in
selling a portfolio security.
(3) Concentrate its investments in any particular industry,
but if it is
deemed appropriate for the attainment of its investment
objective, the Fund
may invest up to 25% of its assets (taken at market value at
the time of each
investment) in securities of issuers in any one industry.
(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 (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.
(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 U.S.
Government securities.
(7) Purchase voting securities of any issuer if 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; or purchase securities of
any issuer if
such purchase at the time thereof would cause more than 10%
of any class of
securities of such issuer to be held by the Fund. For this
purpose all
indebtedness of an issuer shall bedeemed 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 and the
Fund may make
margin deposits in connection with options, Futures
Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign
currencies.
(11) 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
equivalent in kind
and amount to the securities sold and provided that if
such right is
conditional the sale is made upon equivalent conditions.
(12) Purchase securities issued by any other registered
investment company
or investment trust except by purchase in the open market where
no commission
or profit to a sponsor or dealer results from such purchase
other than the
customary broker's commission, or except when such purchase,
though not made
in the open market, is part of a plan of merger or
consolidation; provided,
however, that the Fund will not purchase such securities if
such purchase at
the time thereof would cause more than 10% of its total
assets (taken at
market value) to be invested in the securities of such issuers;
and, provided
further, that the Fund will not purchase securities issued
by an open-end
investment company.
(13) Write, purchase or sell any put or call option 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.
(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. For the purposes of this
restriction,
collateral arrangements with respect to options, Futures
Contracts and Options
on Futures Contracts and collateral arrangements with respect
to initial and
variation margins are not deemed to be the issuance of a senior
security.
As a non-fundamental policy, the Fund will not knowingly invest
in securities
which are subject to legal or contractual restrictions on
resale (other than
repurchase agreements), unless the Board of Trustees has
determined that such
securities are liquid based upon trading markets for the specific
security, if,
as a result thereof, more than 15% of the Fund's net assets
(taken at market
value) would be so invested.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in
companies which,
including their respective predecessors, have a record of less
than three years"
continuous operation.
In order to comply with certain state statutes, the Fund will
not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio
securities if
the percentage of securities so pledged, mortgaged or
hypothecated would exceed
33 1/3%.
These operating policies are not fundamental and may be
changed without
shareholder approval.
4. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision
over the affairs
of the Fund. The Adviser is responsible for the investment
management of the
Fund's assets and the officers of the Trust are responsible for
its operations.
The Trustees and officers of the Trust are listed below,
together with their
principal occupations during the past five years. (Their titles
may have varied
during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman.
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former
Chairman
(until September 30, 1991)
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard
Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T.
Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment
advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisers, Inc. (corporate financial consultants),
President and
Treasurer
Address: is 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice
President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists),
President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June
1994); Sundstrand
Corporation (diversified mechanical manufacturer),
Director; Society
Corporation (bank holding company), Director, (prior to April
1992); Society
National Bank (commercial bank), Director (prior to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
LESLIE J. NANBERG,* Vice President
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President,
General
Counsel and Assistant Secretary (since December 1989)
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and
Associate General
Counsel (since September 1990); associated with a major law
firm (prior to
August 1990)
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since
June 1989)
- ----------
*"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
Massachusetts Financial Services Company ("MFS") or with certain
other funds
of which MFS or a subsidiary is the investment adviser or
distributor. Mr.
Brodkin, the Chairman of MFD, Messrs. Shames and Scott, Directors
of MFD, and
Mr. Cavan, the Secretary of MFD, hold similar positions with
certain other MFS
affiliates. Mr. Bailey is a Director of Sun Life Assurance Company
of Canada
(U.S.) ("Sun Life of Canada (U.S.)"), the corporate parent of MFS.
The Fund pays compensation of non-interested Trustees (who
currently receive a
fee of $1250 per year, $225 per committee meeting and $225 for
attendance at
each meeting together with certain out-of-pocket expenses, as
incurred) and has
adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this
plan, a Trustee will retire upon reaching age 75 and if the
Trustee has
completed at least five years of service, he would be
entitled to annual
payments during his lifetime of up to 50% of such Trustee's
average annual
compensation (based on the three years prior to his retirement)
depending on his
length of service. A Trustee may also retire prior to age 75 and
receive reduced
payments if he has completed at least five years of service.
Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a
period of time
in the event the Trustee is disabled or dies. These benefits will
also be based
on the Trustee's average annual compensation and length of
service. There is no
retirement plan provided by the Trust for the interested Trustees.
The Fund will
accrue its allocable share of compensation expenses each year to
cover current
years service and amortize past service cost.
Set forth in Appendix A hereto is certain information
concerning the cash
compensation paid to non-interested Trustees and Mr. Bailey
and benefits
accrued, and estimated benefits payable under the retirement plan.
As of February 28, 1995, the Trustees and officers, as a group,
owned less than
1% of the outstanding shares of the Fund.
As of February 28, 1995, First Interstate Bank, FBO Tesseract
Corp., P.O. Box
9800, Calabasas, CA 91372-0800, was the recorded owner of
approximately 5.15% of
the outstanding Class A shares of the Fund. As of February 28,
1995, William
Clements, Tr, Golden Eagle Distributors and Sales, Capital
Accumulation and PSRP
Master, P.O. Box 27506, Tucson, AZ 85726-7506 was the
record owner of
approximately 5.60% of the outstanding Class A shares of the
Fund. As of
February 28, 1995, Floyd Terry Taylor, Jerry Elaine Taylor, JT
WROS, Rainsville,
AL, was the record owner of approximately 6.25% of the
outstanding Class A
shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify
its Trustees and
officers against liabilities and expenses incurred in connection
with litigation
in which they may be involved because of their offices with the
Trust, unless,
as to liabilities to the Trust or its shareholders, it is
finally adjudicated
that they engaged in willful misfeasance, bad faith, gross
negligence or
reckless disregard of the duties involved in their offices, or
with respect to
any matter, unless it is adjudicated that they did not act in
good faith in the
reasonable belief that their actions were in the best interest of
the Trust. In
the case of settlement, such indemnification will not be provided
unless it has
been determined pursuant to the Declaration of Trust, that
such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money
management dating
from 1924. MFS is a wholly owned subsidiary of Sun Life of
Canada (U.S.) which
in turn is a wholly owned subsidiary of Sun Life Assurance Company
of Canada.
The Adviser manages the assets of the Fund pursuant to an
Investment Advisery
Agreement with the Fund dated as of September 1, 1993
(the "Advisery
Agreement"). The Adviser provides the Fund with overall
investment advisory and
administrative services, as well as general office facilities.
Subject to such
policies as the Trustees may determine, the Adviser makes
investment decisions
for the Fund. For these services and facilities, the Adviser
receives an annual
management fee, computed and paid monthly, in an amount equal
to the sum of
0.75% of the Fund's average daily net assets.
For the Fund's fiscal year ended November 30, 1992, the Fund's
former investment
adviser, Lifetime Advisers, Inc., a Delaware corporation and
a wholly owned
subsidiary of MFS ("LAI"), received $2,784,709 under its advisory
agreement with
the Fund. LAI had no employees and relied on the Adviser to
furnish it with
overall administrative services and general office facilities.
For the Fund's
fiscal year ended November 30, 1993, MFS, together with
LAI, received in
aggregate $3,481,771 under their investment advisory agreements
with the Fund.
For the Fund's fiscal year ended November 30, 1994, MFS
received $3,217,779
under its investment advisory agreement with the Fund.
In order to comply with the expense limitations of certain
state securities
commissions, the Adviser will reduce its management fee or
otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes
and brokerage
commissions, incurred by the Fund in any fiscal year to the extent
such expenses
exceed the most restrictive of such state expense limitations.
The Adviser will
make appropriate adjustments to such reductions and
reimbursements in response
to any amendment or rescission of the various state requirements.
The Fund pays the compensation of the Trustees who are not
officers of MFS and
all expenses of the Fund (other than those assumed by the
Adviser or MFD)
including: governmental fees; interest charges; taxes;
membership dues in the
Investment Company Institute allocable to the Fund; fees and
expenses of
independent auditors, of legal counsel, and of any transfer agent,
registrar or
dividend disbursing agent of the Fund; expenses of repurchasing
and redeeming
shares and servicing shareholder accounts; expenses of preparing,
printing and
mailing share certificates, periodic reports, notices and proxy
statements to
shareholders and to governmental officers and commissions;
brokerage and other
expenses connected with the execution, recording and
settlement of portfolio
security transactions; insurance premiums; fees and expenses
of State Street
Bank and Trust Company, the Fund's Custodian, for all
services to the Fund,
including safekeeping of funds and securities and maintaining
required books and
accounts; expenses of calculating the net asset value of shares of
the Fund; and
expenses of shareholder meetings. Expenses relating to
the issuance,
registration and qualification of shares of the Fund and the
preparation,
printing and mailing of prospectuses are borne by the Fund
except that the
Fund's Distribution Agreement with MFD requires MFD to pay for
prospectuses that
are to be used for sales purposes. Expenses of the Trust
which are not
attributable to a specific series are allocated among the
series in a manner
believed by management of the trust to be fair and equitable. For
a list of the
Fund's expenses, including the compensation paid to the
Trustees who are not
officers of MFS, during the fiscal year ended November 30, 1994,
see "Financial
Statements -- Statement of Operations" in the Annual Report to
Shareholders.
Payment by the Fund of brokerage commissions for brokerage and
research services
of value to the Adviser in serving its clients is discussed
under the caption
"Portfolio Transactions and Brokerage Commissions" below.
MFS pays the compensation of the Trust's officers and of any
Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense
all necessary
administrative services, including office space, equipment,
clerical personnel,
investment advisory facilities, and all executive and
supervisory personnel
necessary for managing the Fund's investments, effecting
its portfolio
transactions and, in general, administering its affairs.
The Advisory Agreement with the Fund will remain in effect until
August 1, 1994,
and will continue in effect thereafter only if such continuance
is specifically
approved at least annually by the Board of Trustees or by vote of
a majority of
the Fund's shares (as defined in "Investment Restrictions") and,
in either case,
by a majority of the Trustees who are not parties to the Advisery
Agreement or
interested persons of any such party. The Advisory
Agreement terminates
automatically if it is assigned and may be terminated without
penalty by vote of
a majority of the Fund's shares (as defined in "Investment
Restrictions") or by
either party on not more than 60 days" nor less than 30 days'
written notice.
The Advisery Agreement provides that if MFS ceases to serve as
the Adviser to
the Fund, the Fund will change its name so as to delete the term
"MFS" and that
MFS may render services to others and may permit other fund
clients to use the
term "MFS" in their names. The Advisery 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 Advisery
Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the
custodian of the
Fund's assets. The Custodian's responsibilities include
safekeeping and
controlling the Fund's cash and securities, handling the receipt
and delivery of
securities, determining income and collecting interest and
dividends on the
Fund's investments, maintaining books of original entry for
portfolio and fund
accounting and other required books and accounts, and calculating
the daily net
asset value and public offering price of each class of shares of
the Fund. The
Custodian does not determine the investment policies of the Fund
or decide which
securities the Fund will buy or sell. The Fund may,
however, invest in
securities of the Custodian and may deal with the Custodian
as principal in
securities transactions. The Trustees have reviewed and approved
as in the best
interests of the Fund and its shareholders the custodial
arrangements with Chase
Manhattan Bank, N.A., for securities of the Fund held outside the
United States.
Such securities will be held pursuant to the requirements of
SEC Rule 17f-5
under the 1940 Act. The Custodian also serves as the dividend and
distribution
disbursing agent of the Fund. The Custodian has contracted with
the Adviser for
the Adviser to perform certain accounting functions
related to options
transactions for which the Adviser receives remuneration on a cost
basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"),
a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent,
pursuant to a
Shareholder Servicing Agent Agreement with the Trust, dated as of
September 10,
1986 (the "Agency Agreement"). The Shareholder
Servicing Agent's
responsibilities under the Agency Agreement include administering
and performing
transfer agent functions and the keeping of records in
connection with the
issuance, transfer and redemption of each class of shares of the
Fund. For these
services, the Shareholder Servicing Agent will receive a fee
based on the net
assets of each class of shares of the Fund, computed and paid
monthly. In
addition, the Shareholder Servicing Agent will be reimbursed
by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on
behalf of the
Fund. State Street Bank and Trust Company, the dividend and
distribution
disbursing agent for the Fund, has contracted with the
Shareholder Servicing
Agent to administer and perform certain dividend and
distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for
the continuous
offering of shares of the Fund pursuant to a Distribution
Agreement, dated
January 1, 1995 (the "Distribution Agreement"). Prior to
January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was
the Fund's distributor. Where this SAI refers to MFD in relation
to the receipt
or payment of money with respect to a period or periods prior
to January 1,
1995, such reference shall be deemed to include FSI, as the
predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares
of the Fund to
dealers. The public offering price of the Class A shares of the
Fund is their
net asset value next computed after the sale plus a sales
charge which varies
based upon the quantity purchased. The public offering price of a
Class A share
of the Fund is calculated by dividing the net asset value of a
Class A share by
the difference (expressed as a decimal) between 100% and the
sales charge
percentage of offering price applicable to the purchase (see
"Purchases" in the
Prospectus). The sales charge scale set forth in the
Prospectus applies to
purchases of Class A shares of the Fund alone or in combination
with shares of
all classes of certain other funds in the MFS Family of Funds
(the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any
person, including
members of a family unit (e.g., husband, wife and minor children)
and bona fide
trustees, and also applies to purchases made under the Riight of
Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" in
this Statement
of Additional Information). A group might qualify to obtain
quantity sales
charge discounts (see "Investment and Withdrawal Programs" in
this Statement of
Additional Information).
Class A shares of the Fund may be sold at their net asset
value to certain
persons or in certain transactions as described in the
Prospectus. Such sales
are made without a sales charge to promote good will with
employees and others
with whom MFS, MFD and/or the Fund have business relationships,
and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all
dealers) from the
applicable public offering price of the Class A shares.
Dealer allowances
expressed as a percentage of offering price for all offering
prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The
commission paid
to the underwriter is the difference between the total amount
invested and the
sum of (a) the net proceeds to the Fund and (b) the dealer
commission. Because
of rounding in the computation of offering price, the
portion of the sales
charge paid to the underwriter may vary and the total sales
charge may be more
or less than the sales charge calculated using the sales charge
expressed as a
percentage of the offering price or as a percentage of the net
amount invested
as listed in the Prospectus. In the case of the maximum sales
charge the dealer
retains 5% and MFD retains approximately 3/4 of 1% of the public
offering price.
In addition, MFD pays a commission to dealers who initiate and
are responsible
for purchases of $1 million or more as described in the
Prospectus.
During the period September 7, 1993 through November 30, 1993,
MFD received
sales charges of $897 and dealers received sales charges of
$5,643 (as their
concession on gross sales charges of $6,540) for selling Class A
shares of the
Fund; the Fund received $173,360 representing the aggregate net
asset value of
such shares.
During the fiscal year ended November 30, 1994, MFD received
sales charges of
$6,476 and dealers received sales charges of $41,422 (as their
concession on
gross sales charges of $47,898) for selling Class A shares of the
Fund; the Fund
received $2,060,615 representing the aggregate net asset value of
such shares.
During the fiscal year ended November 30, 1994, the CDSC imposed
on redemption
of Class A shares was approximately $42.
CLASS B SHARES: MFD acts as agent in selling Class B shares of
the Fund. The
public offering price of Class B shares is their net asset value
next computed
after the sale (see "Purchases" in the Prospectus).
During the fiscal years ended November 30, 1994, 1993 and 1992,
the CDSC imposed
on redemption of Class B shares was approximately $748,300,
$698,000 and
$700,000 respectively.
GENERAL: Neither MFD nor dealers are permitted to delay
placing orders to
benefit themselves by a price change. On occasion, MFD may obtain
brokers loans
from various banks, including the custodian banks for the
MFS Funds, to
facilitate the settlement of sales of shares of the Fund to
dealers. MFD may
benefit from its temporary holding of funds paid to it by
investment dealers for
the purchase of Funds shares.
The Distribution Agreement will remain in effect until August 1,
1996 and will
continue in effect thereafter only if such continuance is
specifically approved
at least annually by the Board of Trustees or by vote of a
majority of the
Trust's shares (as defined in "Investment Restrictions") and in
either case, by
a majority of the Trustees who are not parties to such
Distribution Agreement or
interested persons of any such party. The Distribution
Agreement terminates
automatically if it is assigned and may be terminated without
penalty by either
party on not more than 60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for the
Fund are made by
employees of the Adviser, who are appointed and supervised
by its senior
officers. Changes in the Fund's investments are reviewed by
the Board of
Trustees. The Fund's portfolio manager may serve other clients of
the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security
transactions with
broker-dealers for execution is to obtain and maintain the
availability of
execution at the most favorable prices and in the most
effective manner
possible. The Adviser attempts to achieve this result
by selecting
broker-dealers to execute portfolio transactions on behalf of the
Fund and other
clients of the Adviser on the basis of their professional
capability, the value
and quality of their brokerage services, and the level of
their brokerage
commissions. In the case of securities, such as government
securities, which are
principally traded in the over-the-counter market (where no
stated commissions
are paid but the prices include a dealer's markup or markdown),
the Adviser
normally seeks to deal directly with the primary market makers,
unless in its
opinion, better prices are available elsewhere. In the case
of securities
purchased from underwriters, the cost of such securities
generally includes a
fixed underwriting commission or concession. Securities
firms or futures
commission merchants may receive brokerage commissions on
transactions involving
options, Futures Contracts and Options on Futures Contracts and
the purchase and
sale of underlying securities upon exercise of options.
The brokerage
commissions associated with buying and selling options may be
proportionately
higher than those associated with general securities transactions.
From time to
time, soliciting dealer fees are available to the Adviser on the
tender of the
Fund's portfolio securities in so-called tender or exchange
offers. Such
soliciting dealer fees are in effect recaptured for the Fund by
the Adviser. At
present no other recapture arrangements are in effect.
Under the Advisery Agreement and as permitted by Section 28(e) of
the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer,
which provides brokerage and research services to the Adviser,
an amount of
commission for effecting a securities transaction for the Fund in
excess of the
amount other broker-dealers would have charged for the
transaction if the
Adviser determines in good faith that the greater commission is
reasonable in
relation to the value of the brokerage and research services
provided by the
executing broker-dealer viewed in terms of either a particular
transaction or
the Adviser's overall responsibilities to the Fund or to its
other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as
to the value of
securities, the advisability of purchasing or selling
securities, and the
availability of purchasers or sellers of securities; furnishing
analyses and
reports concerning issues, industries, securities, economic
factors and trends,
portfolio strategy and the performance of accounts; and
effecting securities
transactions and performing functions incidental thereto such as
clearance and
settlement.
Although commissions paid on every transaction will, in the
judgment of the
Adviser, be reasonable in relation to the value of the
brokerage services
provided, commissions exceeding those which another broker might
charge may be
paid to broker-dealers who were selected to execute
transactions on behalf of
the Fund and the Adviser's other clients in part for providing
advice as to the
availability of purchasers or sellers of securities and
services in effecting
securities transactions and performing functions incidental
thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual
information or services ("Research") to the Adviser for no
consideration other
than brokerage or underwriting commissions. Securities may be
bought or sold
through such broker-dealers, but at present, unless otherwise
directed by the
Fund, a commission higher than one charged elsewhere will not be
paid to such a
firm solely because it provided Research to the Adviser. The
Trustees (together
with the Trustees of the other MFS Funds) have directed the
Adviser to allocate
a total of $20,000 of commission business from the MFS Funds to
the Pershing
Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal
of the Lipper Directors' Analytical Data Service (which
provides information
useful to the Trustees in reviewing the relationship between
the Fund and the
Adviser).
The Adviser's investment management personnel attempt to evaluate
the quality of
Research provided by brokers. Results of this effort are
sometimes used by the
Adviser as a consideration in the selection of brokers to
execute portfolio
transactions. However, the Adviser is unable to quantify
the amount of
commissions which will be paid as a result of such
Research because a
substantial number of transactions will be effected through
brokers which
provide Research but which were selected principally because of
their execution
capabilities.
The management fee that the Fund pays to the Adviser will not
be reduced as a
consequence of the Adviser's receipt of brokerage and research
services. To the
extent the Fund's portfolio transactions are used to obtain such
services, the
brokerage commissions paid by the Fund will exceed those that
might otherwise be
paid, by an amount which cannot be presently determined. Such
services would be
useful and of value to the Adviser in serving both the Fund and
other clients
and, conversely, such services obtained by the placement of
brokerage business
of other clients would be useful to the Adviser in carrying out
its obligations
to the Fund. While such services are not expected to reduce the
expenses of the
Adviser, the Adviser would, through use of the services, avoid
the additional
expenses which would be incurred if it should attempt to
develop comparable
information through its own staff.
For the Fund's fiscal year ended November 30, 1994, the
Fund paid total
brokerage commissions of $712,538 on total transactions
(other than U.S.
Government Securities, purchased options transactions
and short-term
obligations) of $487,667,581.
For the Fund's fiscal year ended November 30, 1993, the
Fund paid total
brokerage commissions of $853,622 on total transactions
(other than U.S.
Government securities, purchased options transactions
and short term
obligations) of $673,496,272. For the Fund's fiscal year ended
November 30,
1992, the Fund paid total brokerage commissions of
$525,543 on total
transactions (other than U.S. Government securities,
purchased options
transactions and short-term obligations) of $510,550,700. Not all
of the Fund's
transactions are equity security transactions which involve
the payment of
brokerage commissions.
In certain instances there may be securities which are suitable
for the Fund's
portfolio as well as for that of one or more of the other clients
of the Adviser
or MFS or any subsidiary of MFS. Investment decisions for the
Fund and for such
other clients are made with a view to achieving their
respective investment
objectives. It may develop that a particular security is bought or
sold for only
one client even though it might be held by, or bought or
sold for, other
clients. Likewise, a particular security may be bought for one
or more clients
when one or more other clients are selling that same security.
Some simultaneous
transactions are inevitable when several clients receive
investment advice from
the same investment adviser, particularly when the same security
is suitable for
the investment objectives of more than one client. When two or
more clients are
simultaneously engaged in the purchase or sale of the same
security, the
securities are allocated among clients in a manner believed to
be equitable to
each. It is recognized that in some cases this system could have
a detrimental
effect on the price or volume of the security as far as the Fund
is concerned.
In other cases, however, it is believed that the Fund's ability
to participate
in volume transactions will produce better executions for the
Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available
the following
programs designed to enable shareholders to add to their
investment or withdraw
from it with a minimum of paper work. These are described below
and, in certain
cases, in the Prospectus. The programs involve no extra charge
to shareholders
(other than a sales charge in the case of certain Class A share
purchases) and
may be changed or discontinued at any time by a shareholder or the
Fund.
LETTER OF INTENT: If a shareholder (other than a group
purchaser described
below) anticipates purchasing $100,000 or more of Class A
shares of the Fund
alone or in combination with any class of shares of other MFS
Funds or MFS Fixed
Fund within a 13-month period (or 36-month period in the case of
purchases of $1
million or more), the shareholder may obtain Class A shares of
the Fund at the
same reduced sales charge as though the total quantity were
invested in one lump
sum by completing the Letter of Intent section of the Account
Application or
filing a separate Letter of Intent application (available from
the Shareholder
Servicing Agent) within 90 days of the commencement of
purchases. Subject to
acceptance by MFD and the conditions mentioned below, each
purchase will be made
at a public offering price applicable to a single transaction
of the dollar
amount specified in the Letter of Intent application. The
shareholder or his
dealer must inform MFD that the Letter of Intent is in effect
each time shares
are purchased. The shareholder makes no commitment to
purchase additional
shares, but if his purchases within 13 months (or 36 months
in the case of
purchases of $1 million or more) plus the value of shares
credited toward
completion of the Letter of Intent do not total the sum
specified, he will pay
the increased amount of the sales charge as described below.
Instructions for
issuance of shares in the name of a person other than the person
signing the
Letter of Intent application must be accompanied by a written
statement from the
dealer stating that the shares were paid for by the person
signing such Letter.
Neither income dividends nor capital gain distributions taken
in additional
shares will apply toward the completion of the Letter of Intent.
Dividends and
distributions of other MFS Funds automatically reinvested in
shares of the Fund
pursuant to the Distribution Investment Program will also not
apply toward
completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent
purchases if
necessary), 5% of the dollar amount specified in the
Letter of Intent
application shall be held in escrow by the Shareholder
Servicing Agent in the
form of shares registered in the shareholder's name. All income
dividends and
capital gain distributions on escrowed shares will be paid to the
shareholder or
to his order. When the minimum investment so specified is
completed (either
prior to or by the end of the 13-month or 36-month period, as
applicable) the
shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder
Servicing Agent
will redeem an appropriate number of the escrowed shares in
order to realize
such difference. Shares remaining after any such redemption will
be released by
the Shareholder Servicing Agent. By completing and signing
the Account
Application or separate Letter of Intent application,
the shareholder
irrevocably appoints the Shareholder Servicing Agent his
attorney to surrender
for redemption any or all escrowed shares with full power of
substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for
cumulative quantity
discounts on the purchase of Class A shares when that
shareholder's new
investment, together with the current offering price value of
all the holdings
of all classes of shares of that shareholder in the MFS Funds or
MFS Fixed Fund
reaches a discount level (see "Purchases" in the Prospectus
for the sales
charges on quantity purchases). For example, if a shareholder owns
shares with a
current offering price value of $75,000 and purchases an
additional $25,000 of
Class A shares of the Fund, the sales charge for the $25,000
purchase would be
at the rate of 4% (the rate applicable to single transactions of
$100,000). A
shareholder must provide the Shareholder Servicing Agent (or
his investment
dealer must provide MFD) with information to verify that the
quantity sales
charge discount is applicable at the time the investment is made.
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 the other
MFS Funds, if
shares of the fund are available for sale. Such investments will
be subject to
additional purchase minimums. Distributions will be invested at
net asset value
(exclusive of any sales charge) and will not be subject
to any CDSC.
Distributions will be invested at the close of business on the
payable date for
the distribution. A shareholder considering the Distribution
Investment Program
should obtain and read the prospectus of the other fund and
consider the
differences in objectives and policies before making any
investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the
Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic
payments, as
designated on the Account Application and based upon the value
of his account.
Each payment under a Systematic Withdrawal Plan ("SWP") must be
at least $100,
except in certain limited circumstances. The aggregate
withdrawals of Class B
shares made in any year pursuant to a SWP generally are limited
to 10% of the
value of the account at the time of the establishment of the
SWP. SWP payments
are drawn from the proceeds of share redemptions (which would
be a return of
principal and, if reflecting a gain, would be taxable).
Redemptions of Class B
shares will be made in the following order: (i) any "Free
Amount"; (ii) to the
extent necessary, any "Reinvested Shares"; and (iii) to the
extent necessary,
"Direct Purchase" subject to the lowest CDSC (as such terms
are defined in
"Contingent Deferred Sales Charge" in the Prospectus). The CDSC
will be waived
in the case of redemptions of Class B shares pursuant to a SWP
but will not be
waived in the case of SWP redemptions of Class A shares which
are subject to a
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 $10,000
either must be held on deposit by, or certificates for such
shares must be
deposited with, the Shareholder Servicing Agent. With respect to
Class A shares,
maintaining a withdrawal plan concurrently with an investment
program would be
disadvantageous because of the sales charges included in share
purchases and the
imposition of a CDSC on certain redemptions. The
shareholder by written
instruction to the Shareholder Servicing Agent may deposit
into the account
additional shares of the Fund, change the payee or change the
amount of each
payment. The Shareholder Servicing Agent may charge the
account for services
rendered and expenses incurred beyond those normally assumed by
the Fund with
respect to the liquidation of shares. No charge is currently
assessed against
the account, but one could be instituted by the Shareholder
Servicing Agent on
60 days' notice in writing to the shareholder in the event that
the Fund ceases
to assume the cost of these services. The Fund may terminate
any SWP for an
account if the value of the account falls below $5,000 as a
result of share
redemptions (other than as a result of a SWP ) or an exchange of
shares of the
Fund for shares of another MFS Fund. Any SWP may be terminated
at any time by
either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the
Fund may be made
at any time either by mailing a check payable to the Fund
directly to the
Shareholder Servicing Agent. The shareholder's account number
and the name of
his investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may
be treated as a
single purchaser and, under the Right of Accumulation (but not
the Letter of
Intent), obtain quantity sales charge discounts on the
purchase of Class A
shares if the group (1) gives its endorsement or authorization to
the investment
program so it may be used by the investment dealer to facilitate
solicitation of
the membership, thus effecting economies of sales effort;
(2) has been in
existence for at least six months and has a legitimate purpose
other than to
purchase mutual fund shares at a discount; (3) is not a group
of individuals
whose sole organizational nexus is as credit cardholders
of a company,
policyholders of an insurance company, customers of a bank or
broker-dealer,
clients of an investment adviser or other similar groups; and
(4) agrees to
provide certification of membership of those members investing
money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of
at least $5,000
in any MFS Fund may exchange their shares for the same class of
shares of the
other MFS Funds (if available for sale) under the Automatic
Exchange Plan. The
Automatic Exchange Plan provides for automatic exchange of
funds from the
shareholder's account in an MFS Fund for investment in the same
class of shares
of other MFS Funds selected by the shareholder. Under the
Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four
different funds
effective on the seventh day of each month or of every third
month, depending
whether monthly or quarterly exchanges are elected by the
shareholder. If the
seventh day of the month is not a business day, the
transaction will be
processed on the next business day. Generally, the initial
exchange will occur
after receipt and processing by the Shareholder Servicing
Agent of an
application in good order. Transfers will continue to be
made from a
shareholder's account in any MFS Fund as long as the balance of
the account is
sufficient to complete the exchanges. Additional
payments made to a
shareholder's account will extend the period that exchanges will
continue to be
made under the Automatic Exchange Plan. However, if additional
payments are
added to an account subject to the Automatic Exchange Plan
shortly before an
exchange is scheduled, such funds may not be available for
exchanges until the
following month; therefore, care should be used to avoid
inadvertently
terminating the Automatic Exchange Plan through exhaustion
of the account
balance.
No transaction fee for exchanges will be charged in
connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS
Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash
Reserve Fund
will be subject to any applicable sales charge. Changes in
amounts to be
exchanged to each fund, the funds to which exchanges are to
be made and the
timing of exchanges (monthly or quarterly), or termination of a
shareholder's
participation in the Automatic Exchange Plan will be made after
instructions in
writing or by telephone (an "Exchange Change Request") are
received by the
Shareholder Servicing Agent in proper form (i.e., if in writing
signed by the
record owner(s) exactly as shares are registered; if by telephone
proper account
identification is given by the dealer or shareholder of record).
Each Exchange
Change Request (other than termination of participation in the
program) must
involve at least $50. Generally, if an Exchange Change Request
is received by
telephone or in writing before the close of business on the last
business day of
the month, the Exchange Change Request will be effective for
the following
month's exchange.
A shareholder's right to make additional investments in any of the
MFS Funds, to
make exchanges of shares from one MFS Fund to another and to
withdraw from an
MFS Fund, as well as a shareholder's other rights and
privileges are not
affected by a shareholder's participation in the Automatic
Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege.
For additional
information regarding the Automatic Exchange Plan, including
the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and
shareholders of the
other MFS Funds (except holders of shares of MFS Money
Market Fund, MFS
Government Money Market Fund and holders of Class A shares of
MFS Cash Reserve
Fund in the case where such shares are acquired through direct
purchase or
reinvested dividends) who have redeemed their shares have a
one-time right to
reinvest the redemption proceeds in the same class of shares of
any of the MFS
Funds (if shares of the fund are available for sale) at net asset
value (without
a sales charge) and, if applicable, with credit for any CDSC
paid. In the case
of proceeds reinvested in shares of MFS Money Market Fund, MFS
Government Money
Market Fund and Class A shares of MFS Cash Reserve Fund, the
shareholder has the
right to exchange the acquired shares for shares of another
MFS Fund at net
asset value pursuant to the exchange privilege described
below. Such a
reinvestment must be made within 90 days of the redemption and is
limited to the
amount of the redemption proceeds. If the shares credited for any
CDSC paid are
then redeemed within six years of the initial purchase in the
case of Class B
shares or 12 months of the initial purchase in the case of
certain Class A
shares, a CDSC will be imposed upon redemption. Although
redemptions and
repurchases of shares are taxable events, a reinvestment within a
certain period
of time in the same fund may be considered a "wash sale" and may
result in the
inability to recognize currently all or a portion of any loss
realized on the
original redemption for federal income tax purposes. Please see
your tax adviser
for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth
below, some or all
of the shares in an account for which payment has been
received by the Fund
(i.e., an established account) may be exchanged for shares of the
same class of
any of the other MFS Funds (if available for sale) at net asset
value. Exchanges
will be made only after instructions in writing or by telephone
(an "Exchange
Request") are received for an established account by the
Shareholder Servicing
Agent.
Each Exchange Request must be in proper form (i.e., if in writing
signed by the
record owner(s) exactly as the shares are registered; if by
telephone proper
account identification is given by the dealer or shareholder of
record), and
each exchange must involve either shares having an aggregate
value of at least
$1,000 ($50 in the case of retirement plan participants
whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or
another similar
401(k) recordkeeping system made available by the Shareholder
Servicing Agent)
or all the shares in the account. Each exchange involves the
redemption of the
shares of the Fund to be exchanged and the purchase at net
asset value (i.e.,
without a sales charge) of shares of the same class of the other
MFS Fund. Any
gain or loss on the redemption of the shares exchanged is
reportable on the
shareholder's federal income tax return, unless both the shares
received and the
shares surrendered in the exchange are held in a tax-deferred
retirement plan or
other tax-exempt account. No more than five exchanges may be
made in any one
Exchange Request by telephone. If an Exchange Request is
received by the
Shareholder Servicing Agent prior to the close of regular
trading on the
Exchange, the exchange usually will occur on that day if all of
the requirements
set forth above have been complied with at that time. However,
payment of the
redemption proceeds by the Fund, and thus the purchase of
shares of the other
MFS Fund, may be delayed for up to seven days if the Fund
determines that such a
delay would be in the best interest of all its shareholders.
Investment dealers
which have satisfied criteria established by MFD may also
communicate a
shareholder's Exchange Request to the Shareholder Servicing
Agent by facsimile
subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although
liability for the
CDSC is carried forward to the exchanged shares. For purposes of
calculating the
CDSC upon redemption of shares acquired in an exchange, the
purchase of shares
acquired in one or more exchanges is deemed to have occurred at
the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds,
including a copy of
its current prospectus, may be obtained from investment
dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange
should obtain
and read the prospectus of the other MFS Fund and consider the
differences in
objectives and policies before making any exchange. Shareholders
of the other
MFS Funds (except shares of MFS Money Market Fund, MFS Government
Money Market
Fund and Class A shares of MFS Cash Reserve Fund in the case
where such shares
were acquired through direct purchase and dividends reinvested
prior to June 1,
1992) have the right to exchange their shares for shares of the
Fund, subject to
the conditions, if any, set forth in their respective
prospectuses. In addition,
unitholders of the MFS Fixed Fund have the right to exchange their
units (except
units acquired through direct purchases) for shares of the Fund,
subject to the
conditions, if any, imposed upon such unitholders by the MFS Fixed
Fund.
Any state income tax advantages for investment in shares of each
state- specific
series of MFS Municipal Series Trust may only benefit residents
of such states.
Investors should consult with their own tax advisers to be
sure this is an
appropriate investment based on their residency and each
state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or
discontinued and
is subject to certain limitations , including certain
restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund are
available for purchase
by all types of tax-deferred retirement plans. MFD makes
available through
investment dealers plans and/or custody agreements for the
following:
Individual Retirement Accounts (IRAs) (for individuals and their
non- employed
spouses who desire to make limited contributions to a tax-
deferred retirement
program and, if eligible, to receive a federal income tax
deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal
Revenue Code
of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees
of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or
custodian (unless
another trustee or custodian is designated by the
individual or group
establishing the plan) and contain specific information about
the plans. Each
plan provides that dividends and distributions will be reinvested
automatically.
For further details with respect to any plan, including fees
charged by the
trustee, custodian or MFD, tax consequences and redemption
information, see the
specific documents for that plan. Plan documents other than
those provided by
MFD may be used to establish any of the plans described above.
Third party
administrative services, available for some corporate plans, may
limit or delay
the processing of transactions.
An investor should consult with his tax adviser before
establishing any of the
tax-deferred retirement plans described above.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify
each year as a
"regulated investment company" under Subchapter M of the
Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable
requirements of
Subchapter M, including requirements as to the nature of the
Fund's gross
income, the amount of Fund distributions, and the composition and
holding period
of the Fund's portfolio assets. Because the Fund intends to
distribute all of
its net investment income and net realized capital gains to
shareholders in
accordance with the timing requirements imposed by the Code, it
is not expected
that the Fund will be required to pay any federal income or
excise taxes,
although the Fund's foreign-source income may be subject to
foreign withholding
taxes. If the Fund should fail to qualify as a "regulated
investment company" in
any year, the Fund would incur a regular corporate federal
income tax upon its
taxable income and Fund distributions would generally be
taxable as ordinary
dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income
taxes, and any
state or local taxes, on the dividends and capital gain
distributions they
receive from the Fund. Dividends from income, including certain
foreign currency
gains, and any distributions from net short-term capital
gains, (whether
received in cash or reinvested in additional shares) are taxable
to shareholders
as ordinary income for federal income tax purposes. A portion
of the Fund's
ordinary income dividends (but none of its capital gains) is
eligible for the
dividends received deduction for corporations if the
recipient otherwise
qualifies for that deduction with respect to its holding of the
Fund's shares.
Availability of the deduction to particular corporate shareholders
is subject to
certain limitations, and deducted amounts may be subject to
the alternative
minimum tax or result in certain basis adjustments. Distributions
of net capital
gains (i.e., the excess of the net long-term capital gains over
the short-term
capital losses), whether received in cash or invested in
additional shares, are
taxable to the Fund's shareholders as long-term capital gains for
federal income
tax purposes regardless of how long they have owned shares in
the Fund. Fund
dividends declared in October, November, or December and paid
the following
January, will be taxable to shareholders as if received on
December 31 of the
year in which they are declared.
Any dividend or distribution will have the effect of reducing the
per share net
asset value of shares in the Fund by the amount of the dividend or
distribution.
Shareholders purchasing shares shortly before the record
date of any
distribution may thus pay the full price for the shares and
then effectively
receive a portion of the purchase price back as a taxable
distribution.
The Fund's current dividend and accounting policies will
affect the amount,
timing, and character of distributions to shareholders, and may,
under certain
circumstances, make an economic return of capital taxable to
shareholders. In
general, any gain or loss realized upon a taxable disposition of
shares of the
Fund by a shareholder that holds such shares as a capital asset
will be treated
as long-term capital gain or loss if the shares have been held
for more than
twelve months and otherwise as a short-term capital gain or loss.
However, any
loss realized upon a disposition of shares in the Fund held for
six months or
less will be treated as long-term capital loss to the
extent of any
distributions of net capital gain made with respect to those
shares. Any loss
realized upon a redemption of shares may also be disallowed under
rules relating
to wash sales. Gain may be increased (or loss reduced) upon a
redemption of
Class A shares of the Fund within ninety days after their
purchase followed by
any purchase (including purchases by exchange or by reinvestment)
of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally
sold subject
to a sales charge) without payment of an additional sales
charge of Class A
shares.
The Fund's investment in certain securities purchased at a market
discount will
cause it to realize income prior to the receipt of cash payments
with respect to
these securities. In order to distribute this income and
avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities
that it might
otherwise have continued to hold, potentially resulting in
additional taxable
gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts and Forward
Contracts will
be subject to special tax rules that may affect the amount,
timing, and
character of Fund income and distributions to shareholders. For
example, certain
positions held by the Fund on the last business day of each
taxable year will be
marked to market (i.e., treated as if closed out) on such day,
and any gain or
loss associated with the positions will be treated as 60%
long-term and 40%
short-term capital gain or loss. Certain positions held by
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, Forward
Contracts, Futures
Contracts and related transactions to the extent necessary
to meet the
requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign
investments of the
Fund. Foreign exchange gains and losses realized by the Fund
will generally be
treated as ordinary income and losses. The holding of foreign
currencies for
non-hedging purposes and investment by the Fund in certain
"passive foreign
investment companies" may be limited in order to avoid a tax on
the Fund. The
Fund may elect to mark to market any investments in "passive
foreign investment
companies" on the last day of each year. This election may
cause the Fund to
recognize income prior to the receipt of cash payments with
respect to those
investments; in order to distribute this income and avoid a tax on
the Fund, the
Fund may be required to liquidate portfolio securities that it
might otherwise
have continued to hold.
Investment income received by the Fund from sources within foreign
countries may
be subject to foreign income taxes withheld at the source; the
Fund does not
expect to be able to pass through to shareholders foreign tax
credits with
respect to such foreign taxes. The United States has entered
into tax treaties
with many foreign countries that may entitle the Fund to a
reduced rate of tax
or an exemption from tax on such income; the Fund intends to
qualify for treaty
reduced rates where available. It is impossible to determine the
effective rate
of foreign tax in advance since the amount of the Fund's assets
to be invested
within various countries is not known.
Dividends and certain other payments to persons who are not
citizens or
residents of the United States or U.S. entities ("Non-U.S.
Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The
Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable
dividends and
other payments to Non-U.S. Persons that are subject to such
withholding,
regardless of whether a lower treaty rate may be permitted.
Any amounts
overwithheld may be recovered by such persons by filing a claim
for refund with
the U.S. Internal Revenue Service within the time period
appropriate to such
claims. The Fund is also required in certain circumstances to
apply backup
withholding of 31% on taxable dividends and redemption
proceeds paid to any
shareholder who does not furnish to the Fund certain
information and
certifications or who is otherwise subject to backup
withholding. Backup
withholding will not, however, be applied to payments that have
been subject to
30% withholding. Distributions received from the Fund by Non-
U.S. Persons may
also be subject to tax under the laws of their own jurisdiction.
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.
8. DETERMINATION OF NET ASSET VALUE;
PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of each class of the Fund is
determined each day
during which the Exchange is open for trading. (As of the date of
this SAI, the
Exchange is open for trading every weekday except for the
following holidays (or
the days on which they are observed): New Year's Day,
Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and
Christmas Day.) This determination is made once during each such
day as of the
close of regular trading on the Exchange by deducting the
amount of the
liabilities attributable to the class from the value of the
assets attributable
to the class and dividing the difference by the number of
shares of the class
outstanding. Forward Contracts will be valued using a pricing
model taking into
consideration market data from an external pricing source. Use
of the pricing
services has been approved by the Board of Trustees. All
other securities,
Futures Contracts and options in the Fund's portfolio (other
than short-term
obligations) for which the principal market is one or more
securities or
commodities exchanges (whether domestic or foreign) will be
valued at the last
reported sale price or at the settlement price prior to the
determination (or if
there has been no current sale, at the closing bid price)
on the primary
exchange on which such securities, Futures Contracts or options
are traded; but
if a securities exchange is not the principal market for
securities, such
securities will, if market quotations are readily available,
be valued at
current bid prices, unless such securities are reported on the
NASDAQ system, in
which case they are valued at the last sale price or, if no
sales occurred
during the day, at the last quoted bid price. Debt securities
(other than
short-term obligations but including listed issues) in the Fund's
portfolio are
valued on the basis of valuations furnished by a pricing service
which utilizes
both dealer-supplied valuations and electronic data processing
techniques which
take into account appropriate factors such as institutional-
sized trading in
similar groups of securities, yields, quality, coupon rate,
maturity, type of
issue, trading characteristics and other market data, without
exclusive reliance
upon quoted prices or exchange or over-the-counter prices, since
such valuations
are believed to reflect more accurately the fair value of
such securities.
Short-term obligations, if any, in the Fund's portfolio are
valued at amortized
cost, which constitutes fair value as determined by the Board
of Trustees.
Short-term securities with a remaining maturity in excess of
60 days will be
valued based upon dealer supplied valuations. Portfolio
securities and
over-the-counter options and Forward Contracts, for which
there are no
quotations or valuations are valued at fair value as determined in
good faith by
or at the direction of the Board of Trustees. A share's net
asset value is
effective for orders received by the dealer prior to its
calculation and
received by MFD, in its capacity as the Fund's distributor, or
its agent, the
Shareholder Servicing Agent, prior to the close of the business
day.
PERFORMANCE INFORMATION
The Fund will calculate its total rate of return for each class
of shares for
certain periods by determining the average annual compounded
rates of return
over those periods that would cause an investment of $1,000
(made with all
distributions reinvested and reflecting the CDSC or the maximum
public offering
price) to reach the value of that investment at the end of the
periods. The Fund
may also calculate (i) a total rate of return, which is not
reduced by the CDSC
(5% maximum for Class B shares purchased on and after January
1, 1993, but
before September 1, 1993 and 4% maximum for Class B shares
purchased on and
after September 1, 1993) and therefore may result in a higher
rate of return,
(ii) a total rate of return assuming an initial account value of
$1,000, which
will result in a higher rate of return since the value of the
initial account
will not be reduced by the sales charge applicable to Class A
shares (5.75%
maximum) and/or (iii) total rates of return which
represent aggregate
performance over a period or year-by-year performance and which
may or may not
reflect the effect of the maximum sales charge or CDSC. The
average annual total
rate of return for Class B shares, reflecting the CDSC, for the
one-year and
five-year periods ended November 30, 1994 and for the period
from December 29,
1986 (the Fund's commencement of investment operations) to
November 30, 1994 was
- -5.15%, 6.81% and 11.19%, respectively. The average annual total
rates of return
for Class B shares, not giving effect to the CDSC, for the
one-year and five
year periods ended November 30, 1994 and for the period from
December 29, 1986
(the Fund's commencement of investment operations) to
November 30, 1994 was
- -1.52%, 7.11% and 11.19%, respectively.
The average annual total rate of return for Class A shares for
the one-year
period ended November 30, 1994 and for the period from
September 7, 1993
(commencement of offering of this class of share) to November
30, 1994 was
- -6.19% and -4.17% (including the effect of the sales charge)
and -0.47% and
0.56% (without the effect of the sales charge).
PERFORMANCE RESULTS
The performance results below, based on an assumed initial
investment of $10,000
in Class B shares, cover the period from December 29, 1986
through December 31,
1994. It has been assumed that dividend and capital gain
distributions were
reinvested in additional shares. Any performance results or total
rate of return
quotation provided by the Fund should not be considered as
representative of the
performance of the Fund in the future since the net asset value of
shares of the
Fund will vary based not only on the type, quality and
maturities of the
securities held in the Fund's portfolio, but also on changes
in the current
value of such securities and on changes in the expenses of
the Fund. These
factors and possible differences in the methods used to calculate
total rates of
return should be considered when comparing the total rate of
return of the Fund
to total rates of return published for other investment
companies or other
investment vehicles. Total rate of return reflects the
performance of both
principal and income. Current net asset value and account
balance information
may be obtained by calling 1-800-MFS-TALK (637-8255).
MFS CAPITAL GROWTH FUND --
CLASS B
---------------------------------
- ------------
DIRECT CAP GAIN
DIVIDEND TOTAL
YEAR ENDED INVESTMENT REINVESTMENT
REINVESTME VALUE
- ---------- ---------- ------------ -------
- --- -----
December 31, 1986*............. $ 9,906 $ 0 $
0 $ 9,906
December 31, 1987.............. 11,053 0
64 11,117
December 31, 1988.............. 12,613 0
216 12,829
December 31, 1989.............. 16,066 0
525 16,591
December 31, 1990.............. 15,359 164
744 16,267
December 31, 1991.............. 18,439 1,752
983 21,174
December 31, 1992.............. 19,093 2,764
1,048 22,905
December 31, 1993.............. 18,386 3,984
1,546 23,916
December 31, 1994.............. 17,319 3,753
2,626 23,698
- ----------
*For the period from the start of business, December 29, 1986,
through December
31, 1987.
EXPLANATORY NOTES -- The results in the table take into account
the annual Rule
12b-1 fees but not the CDSC. No adjustment has been made for
any income taxes
payable by shareholders.
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 Adviser, USA Today,
Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered
Representative,
Institutional Investor, the Investment Company Institute,
Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger,
Shearson Lehman
and Saloman Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media
General, Investment Company Data, The New York Times, Your
Money, Strangers
Investment Adviser, 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.
From time to time the Fund may use charts and graphs to
illustrate the past
performance of various indices such as those mentioned above and
illustrations
using hypothetical rates of return to illustrate the effects of
compounding and
tax-deferral.
The Fund may advertise examples of the effects of periodic
investment plans,
including the principle of dollar cost averaging. In such a
program, an investor
invests a fixed dollar amount in a fund at periodic
intervals, thereby
purchasing fewer shares when prices are high and more shares
when prices are
low. While such a strategy does not assure a profit or guard
against a loss in a
declining market, the investor's average cost per share can be
lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the
first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first
mutual fund to make
full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to
provide in-house analytical capability for an investment
management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual
fund to
register under the Securities Act of 1933. ("Truth in
Securities Act" or
"Full Disclosure Act")
-- 1936 -- Massachusetts Investors Trust is the first mutual
fund to allow
shareholders to take capital gain distributions either
in additional
shares or in cash.
-- 1976 -- MFS Municipal Bond Fund is among the first
municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination
fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS World Governments Fund is established as
America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first open-
end mutual fund
to seek high tax-free income from lower-rated municipal
securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual
fund to target
and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-
end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first-closed-
end, multimarket
high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS Regatta becomes America's first non-qualified
market-value-
adjusted fixed/variable annuity.
-- 1990 -- MFS World Total Return Fund is the first global
balanced fund.
-- 1993 -- MFS World Growth Fund is the first global emerging
markets fund to
offer the expertise of two sub-advisors.
-- 1993 -- MFS becomes money manager of MFS Union Standard
Trust, the first
trust to invest in companies deemed to be union-friendly
by an advisory
board of senior labor officials, senior managers of
companies with
significant labor contracts, academics and other national
labor leaders or
experts.
9. DISTRIBUTION PLANS
CLASS A DISTRIBUTION PLAN: The Trustees have adopted a
Distribution Plan
relating to Class A shares (the "Class A 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 Class
A Distribution
Plan would benefit the Fund and its Class A shareholders.
The Class A
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 effects that could
result were the
Fund required to liquidate portfolio securities to meet
redemptions.
The Class A Distribution Plan provides that the Fund will pay MFD
up to (but not
necessarily all of) an aggregate of 0.35% of the average
daily net assets
attributable to the Class A shares annually in order that MFD
may pay expenses
on behalf of the Fund related to the distribution and servicing
of its Class A
shares. The expenses to be paid by MFD on behalf of the Fund
include a service
fee to securities dealers which enter into a sales agreement
with MFD of up to
0.25% per annum of the portion of the Fund's average
daily net assets
attributable to the Class A shares owned by investors for whom
that securities
dealer is the holder or dealer of record. These payments
are partial
consideration for personal services and/or account maintenance
performed by such
dealers with respect to Class A shares. MFD may from time to
time reduce the
amount of the service fee paid for shares sold prior to a certain
date. MFD may
also retain a distribution fee of 0.10% per annum of the Fund's
average daily
net assets attributable to Class A shares as partial
consideration for services
performed and expenses incurred in the performance of MFD's
obligations as to
Class A shares under the Distribution Agreement with the Fund.
Any remaining
funds may be used to pay for other distribution related expenses
as described in
the Prospectus. Service fees may be reduced for a securities
dealer that is the
holder or dealer of record for an investor who owns shares of the
Fund having a
net asset value at or above a certain dollar level. No service
fee will be paid
(i) to any securities dealer who is the holder or dealer of record
for investors
who own 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 if the
dealer satisfies
certain criteria), or (ii) to any insurance company which has
entered into an
agreement with the Fund and MFD that permits such insurance
company to purchase
shares from the Fund at their net asset value in connection
with annuity
agreements issued in connection with the insurance company's
separate accounts.
Payments under the Class A Distribution Plan will commence on the
date on which
the value of the Fund's net assets attributable to Class A
shares first equals
or exceeds $40,000,000, at which time MFD intends to waive the
0.10% per annum
distribution fee to which it is entitled under the plan until
such time as the
payment of this fee is approved by the Trust's Board of
Trustees. Dealers may
from time to time be required to meet certain other criteria in
order to receive
service fees. MFD or its affiliates are entitled to retain
all service fees
payable under the Class A Distribution Plan for which there
is no dealer of
record or for which qualification standards have not been
met as partial
consideration for personal services and/or account
maintenance services
performed by MFD or its affiliates for shareholder accounts.
Certain banks and
other financial institutions that have agency agreements with
MFD will receive
agency transaction and service fees that are the same as
commissions and service
fees to dealers.
The Class A Distribution Plan will remain in effect until August
1, 1995, and
will continue in effect thereafter only if such continuance is
specifically
approved at least annually by vote of both the Trustees and a
majority of the
Trustees who are not "interested persons" or financially
interested parties to
the Plan ("Class A Distribution Plan Qualified Trustees").
The Class A
Distribution Plan requires that the Fund and MFD each shall
provide to the
Trustees, and the Trustees shall review, at least quarterly, a
written report of
the amounts expended (and purposes therefor) under such
Plan. The Class A
Distribution Plan may be terminated at any time by vote of a
majority of the
Class A Distribution Plan Qualified Trustees or by vote of
the holders of a
majority of the Fund's Class A shares (as defined in "Investment
Restrictions").
Agreements under the Class A 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 Class A
Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
Fund's Class A
shares. The Class A Distribution Plan may not be amended to
increase materially
the amount of permitted distribution expenses without the approval
of a majority
of the Fund's Class A shares (as defined in "Investment
Restrictions") and may
not be materially amended in any case without a vote of the
Trustees and a
majority of the Class A Distribution Plan Qualified Trustees. No
Trustee who is
not an "interested person" has any financial interest in
the Class A
Distribution Plan or in any related agreement.
CLASS B DISTRIBUTION PLAN: The Trustees of the Fund have adopted
a Distribution
Plan relating to Class B shares (the "Class B Distribution
Plan") pursuant to
Section 12(b) of the 1940 Act and the Rule, after having
concluded that there
was a reasonable likelihood that the Class B Distribution Plan
would benefit the
Fund and the Class B shareholders of the Fund. The Class B
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 effects that could result were the Fund
required to liquidate
portfolio securities to meet redemptions. There is, however, no
assurance that
the net assets of the Fund will increase or that the other
benefits referred to
above will be realized.
The Class B Distribution Plan provides that the Fund shall
pay MFD, as the
Fund's distributor for its Class B shares, a daily distribution
fee equal on an
annual basis to 0.75% of the Fund's average daily net assets
attributable to
Class B shares and will pay MFD a service fee of up to 0.25%
per annum of the
Fund's average daily net assets attributable to Class B shares
(which MFD will
in turn pay to securities dealers which enter into a sales
agreement with MFD at
a rate of up to 0.25% per annum of the Fund's average
daily net assets
attributable to Class B shares owned by investors for whom
that securities
dealer is the holder or dealer of record). This service fee is
intended to be
additional consideration for all personal services and/or
account maintenance
services rendered by the dealer with respect to Class B shares.
MFD will advance
to dealers the first-year service fee at a rate equal to 0.25%
per annum of the
amount invested. 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 be come eligible for additional service fees with
respect to such
shares commencing in the thirteenth month following purchase.
Except in the case
of the first year service fee, no service fee 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 from time to time by MFD. MFD,
however, may waive
this minimum amount requirement from time to time if the
dealer satisfies
certain criteria. Dealers may from time to time be required to
meet certain
other criteria in order to receive service fees. MFD or its
affiliates are
entitled to retain all service fees payable under the Class B
Distribution Plan
for which there is no dealer of record or for which qualification
standards have
not been met as partial consideration for personal services
and/or account
maintenance services performed by MFD or its affiliates
for shareholder
accounts.
The purpose of distribution payments to MFD under the Class B
Distribution Plan
is to compensate MFD for its distribution services to the
Fund. MFD pays
commissions to dealers as well as expenses of printing
prospectuses and reports
used for sales purposes, expenses of the preparation and
printing of sales
literature and other distribution related expenses,
including, without
limitation, the cost necessary to provide distribution-related
services, of
personnel, travel, office expenses and equipment. The Class B
Distribution Plan
also provides that MFD will receive all CDSCs (see
"Distribution Plans" and
"Purchases" in the Prospectus).
During the fiscal year ended November 30, 1994, the Fund
incurred expenses of
$4,290,886 (equal to 1.00% of its average daily net assets)
relating to the
distribution and servicing of its Class B shares, of which
MFD retained
$104,640.
In accordance with the Rule, all agreements relating to the Class
B 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
Trustees who are
not "interested persons" (as defined in the 1940 Act) and who
have no direct or
indirect financial interest in the operation of the Class B
Distribution Plan or
in any agreement related to such Plan ("Class B Distribution
Plan Qualified
Trustees"). The Class B Distribution Plan further provides that
the selection
and nomination of Class B Distribution Plan Qualified
Trustees shall be
committed to the discretion of the non-interested Trustees then in
office.
The Class B Distribution Plan will remain in effect until
August 1, 1995 and
will continue in effect thereafter only if such continuance is
specifically
approved at least annually by vote of both the Trustees and a
majority of the
Class B Distribution Plan Qualified Trustees. The Class B
Distribution Plan
requires that the Fund shall provide to the Trustees, and the
Trustees shall
review, at least quarterly, a written report of the amounts
expended (and
purposes therefor) under such Plan. The Class B
Distribution Plan may be
terminated at any time by vote of a majority of the Class B
Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the
Class B shares
of the Fund (as defined in "Investment Restrictions" above).
The Class B
Distribution Plan may not be amended to increase materially
the amount of
permitted distribution expenses without the approval of Class B
shareholders and
may not be materially amended in any case without a vote of the
majority of both
the Trustees and the Class B Distribution Plan Qualified
Trustees. No Trustee
who is not an interested person of the Fund has any financial
interest in the
Class B Distribution Plan or in any related agreement.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the
Fund to issue an
unlimited number of full and fractional Shares of Beneficial
Interest (without
par value) of one or more separate series and to divide or combine
the shares of
any series into a greater or lesser number of shares without
thereby changing
the proportionate beneficial interests in that series. The
Trustees have
currently authorized shares of the Fund and three other series.
The Declaration
of Trust further authorizes the Trustees to classify or reclassify
any series of
shares into one or more classes. Pursuant thereto, the Trustees
have authorized
the issuance of two classes of shares of each of the Trust's four
series, Class
A shares and Class B shares. Each share of a class of the Fund
represents an
equal proportionate interest in the assets of the Fund allocable
to that class.
Upon liquidation of the Fund, shareholders of each class are
entitled to share
pro rata in the net assets of the Fund allocable to such class
available for
distribution to shareholders. The Trust reserves the right to
create and issue
additional series or classes of shares, in which case the shares
of each class
would participate equally in the earnings, dividends and assets
allocable to
that class of the particular series.
Shareholders are entitled to one vote for each share held and
may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders.
Although Trustees are not elected annually by the shareholders,
shareholders
have under certain circumstances the right to remove one or
more Trustees in
accordance with the provisions of Section 16(c) of the 1940
Act. No material
amendment may be made to the Declaration of Trust without the
affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive
or conversion
rights (except as described in "Purchases - Conversion of Class B
Shares" in the
Prospectus). Shares are fully paid and non-assessable. The Trust
may enter into
a merger or consolidation, or sell all or substantially all of
its assets (or
all or substantially all of the assets belonging to any series of
the Trust), if
approved by the vote of the holders of two-thirds of the
Trust's outstanding
shares voting as a single class, or of the affected series of the
Trust, as the
case may be, except that if the Trustees of the Trust recommend
such merger,
consolidation or sale, the approval by vote of the holders of a
majority of the
Trust's or the affected series' outstanding shares (as defined
in "Investment
Restrictions") will be sufficient. The Trust or any series of the
Trust may also
be terminated (i) upon liquidation and distribution of its
assets, if approved
by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust
or the affected
series. If not so terminated, the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a
"Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may,
under certain
circumstances, be held personally liable as partners for its
obligations.
However, the Declaration of Trust contains an express disclaimer
of shareholder
liability for acts or obligations of the Trust and provides for
indemnification
and reimbursement of expenses out of Trust property for any
shareholder held
personally liable for the obligations of the Trust. The
Declaration of Trust
also provides that it shall maintain appropriate insurance
(for example,
fidelity bonding and errors and omissions insurance) for the
protection of the
Trust, its shareholders, Trustees, officers, employees and
agents covering
possible tort or other liabilities. Thus, the risk of a
shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances
in which both inadequate insurance existed and the Trust itself
was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the
Trust are not
binding upon the Trustees individually but only upon the
property of the Trust
and that the Trustees will not be liable for any action or
failure to act, but
nothing in the Declaration of Trust protects a Trustee against
any liability to
which he would otherwise be subject by reason of willful
misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of
his office.
11. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent certified public
accountants.
The Portfolio of Investments at November 30, 1994 the Statement
of Assets and
Liabilities at November 30, 1994, the Statement of Operations for
the year ended
November 30, 1994, the Statement of Changes in Net Assets for
each of the two
years in the period ended November 30, 1994, the Financial
Highlights table for
each of the eight years in the period ended November 30, 1994,
the Notes to
Financial Statements and the Independent Auditors' Report,
each of which is
included in the Annual Report to shareholders of the Fund, are
incorporated by
reference into this SAI and have been so incorporated in
reliance upon the
report of Deloitte & Touche LLP, independent certified public
accountants, as
experts in accounting and auditing. A copy of the Annual Report
accompanies this
SAI.
<PAGE>
<TABLE>
<CAPTION>
APPENDIX A
TRUSTEE
COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE
FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM
FUND<F1> FUND EXPENSE<F1> OF SERVICE<F2> FUND
COMPLEX<F3>
- ------------------------------------------------------------------
- ----------------------------------------------------------------
<S> <C>
<C> <C> <C>
Walter E. Robb, III $3,950
$1,790 15 $147,274
Richard B. Bailey 3,275
525 10 226,221
Marshall N. Cohan 3,950
1,566 14 147,274
Sir David Gibbons 3,500
1,095 13 132,024
Ward Smith 3,950
417 13 147,274
Abby M. O'Neill 3,275
327 10 125,924
Dr. Lawrence Cohn 3,500
153 18 133,524
J. Dale Sherratt 3,950
175 20 147,274
<FN>
<F1>For fiscal year ended November 30, 1994
<F2>Based on normal retirement age of 75
<F3>Information provided is for calendar year 1994. All
Trustees served as Trustees of 36 funds within the MFS fund
complex
(having aggregate net assets at December 31, 1994, of
approximately $9,746,460,756) except Mr. Bailey, who served as
Trustee
of 56 funds within the MFS fund complex (having aggregate net
assets at December 31, 1994, of approximately $24,474,119,825).
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS
PAYABLE BY FUND UPON RETIREMENT<F4>
<CAPTION>
YEARS OF SERVICE
-------
- -----------------------------------------------------------------
AVERAGE TRUSTEE FEES
3 5 7 10 OR MORE
- ------------------------------------------------------------------
- -----------------------------------------------------------------
<S> <C>
<C> <C> <C> <C>
$2,950
$443 $ 738 $1,033 $1,475
3,230
485 808 1,131 1,615
3,510
527 878 1,229 1,755
3,790
569 948 1,327 1,895
4,070
611 1,018 1,425 2,035
4,350
653 1,088 1,523 2,175
<FN>
<F4>Other funds in the MFS fund complex provide similar retirement
benefits to the Trustees.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
CAPITAL GROWTH
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MCG-13-
4/95/.5M 3/203
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1994
Common Stocks - 97.7%
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
Issuer Shares Value
- -----------------------------------------------------------------------------
<S> <C> <C>
Aerospace - 6.8%
Allied Signal, Inc. 240,000 $ 7,830,000
Lockheed Corp. 80,000 5,500,000
Martin Marietta Corp. 200,000 8,675,000
McDonnell Douglas Corp. 30,000 4,185,000
------------
$ 26,190,000
- -----------------------------------------------------------------------------
Agricultural Products - 1.4%
ConAgra, Inc. 180,000 $ 5,557,500
- -----------------------------------------------------------------------------
Apparel and Textiles - 5.0%
Nike, Inc., "B" 140,000 $ 8,942,500
Reebok International Ltd. 120,000 4,605,000
VF Corp. 120,000 5,820,000
------------
$ 19,367,500
- -----------------------------------------------------------------------------
Automotive - 1.6%
Eaton Corp. 130,000 $ 6,191,250
- -----------------------------------------------------------------------------
Banks and Credit Companies - 13.8%
Barnett Banks, Inc. 120,000 $ 4,725,000
First Bank Systems, Inc. 200,000 6,650,000
First Security Corp. 40,000 975,000
Firstar Corp. 160,000 4,200,000
NBD Bancorp, Inc. 140,000 3,797,500
National City Corp. 120,000 3,015,000
Norwest Corp. 520,000 11,310,000
SunTrust Banks, Inc. 180,000 8,482,500
U.S. Bancorp 200,000 4,600,000
West One Bancorp 220,000 5,830,000
------------
$ 53,585,000
- -----------------------------------------------------------------------------
Business Machines - 1.5%
Motorola, Inc. 100,000 $ 5,637,500
- -----------------------------------------------------------------------------
Chemicals - 0.2%
Air Products & Chemicals, Inc. 15,000 $ 665,625
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 1.4%
Honeywell, Inc. 180,000 $ 5,265,000
- -----------------------------------------------------------------------------
Conglomerates - 2.3%
ITT Corp. 110,000 $ 8,758,750
- -----------------------------------------------------------------------------
Consumer Goods and Services - 12.3%
Colgate-Palmolive Co. 175,000 $ 10,500,000
Gillette Co. 160,000 11,760,000
Leggett & Platt, Inc. 60,000 2,122,500
Philip Morris Cos., Inc. 180,000 10,755,000
RJR Nabisco Holdings Corp.<F1> 800,000 5,000,000
Sara Lee Corp. 300,000 7,312,500
------------
$ 47,450,000
- -----------------------------------------------------------------------------
Containers - 1.5%
Corning, Inc. 200,000 $ 6,000,000
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Defense Electronics - 1.4%
Loral Corp. 140,000 $ 5,547,500
- -----------------------------------------------------------------------------
Electronics - 2.3%
E-Systems, Inc. 100,000 $ 3,662,500
Intel Corp. 80,000 5,050,000
------------
$ 8,712,500
- -----------------------------------------------------------------------------
Financial Institutions - 4.3%
Beneficial Corp. 170,000 $ 6,205,000
GFC Financial Corp. 140,000 4,130,000
State Street Boston Corp. 200,000 6,300,000
------------
$ 16,635,000
- -----------------------------------------------------------------------------
Food and Beverage Products - 5.0%
Archer-Daniels-Midland Co. 200,000 $ 5,525,000
CPC International, Inc. 190,000 9,737,500
Hershey Foods Corp. 90,000 4,207,500
------------
$ 19,470,000
- -----------------------------------------------------------------------------
Insurance - 8.3%
Allmerica Property & Casualty Co. 180,000 $ 2,700,000
American General Corp. 180,000 4,725,000
American Re Corp.<F1> 100,000 2,587,500
Progressive Corp. Ohio 160,000 5,320,000
Providian Corp. 160,000 4,840,000
Torchmark, Inc. 18,200 600,736
Transamerica Corp. 120,000 5,685,000
UNUM Corp. 160,000 5,840,000
------------
$ 32,298,236
- -----------------------------------------------------------------------------
Medical and Health Products - 4.3%
Johnson & Johnson 120,000 $ 6,405,000
Warner-Lambert Co. 130,000 10,058,750
------------
$ 16,463,750
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 0.9%
Columbia HCA Healthcare Corp. 90,000 $ 3,408,750
- -----------------------------------------------------------------------------
Oils - 4.9%
Amoco Corp. 100,000 $ 6,075,000
Chevron Corp. 220,000 9,597,500
Mobil Corp. 40,000 3,410,000
------------
$ 19,082,500
- -----------------------------------------------------------------------------
Photographic Products - 0.9%
Eastman Kodak Co. 80,000 $ 3,650,000
- -----------------------------------------------------------------------------
Printing and Publishing - 4.3%
Belo (A.H.) Corp., "A" 60,000 $ 3,135,000
Central Newspapers, Inc. 100,000 2,700,000
Times Mirror Co. 150,000 4,631,250
Tribune Co. 120,000 6,015,000
------------
$ 16,481,250
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Railroads - 4.7%
CSX Corp. 120,000 $ 8,340,000
Illinois Central Corp. 180,000 5,445,000
Norfolk Southern Corp. 70,000 4,235,000
------------
$ 18,020,000
- -----------------------------------------------------------------------------
Stores - 6.0%
Dayton-Hudson Corp. 32,600 $ 2,660,975
Federated Department Stores<F1> 200,000 4,100,000
May Department Stores Co. 200,000 7,250,000
Penney (J.C.) & Co. 200,000 9,200,000
------------
$ 23,210,975
- -----------------------------------------------------------------------------
Supermarkets - 0.1%
Albertsons, Inc. 15,800 $ 454,250
- -----------------------------------------------------------------------------
Utilities - Telephone - 1.2%
MCI Communications Corp. 230,000 $ 4,485,000
- -----------------------------------------------------------------------------
Foreign - 1.5%
Sweden
Astra, "B", Free (Pharmaceuticals)<F1> 100,000 $ 2,677,660
Hennes & Mauritz AB (Retail) 40,000 2,078,500
Skandinaviska Enskilda Banken, "A"
(Finance)<F1> 50,000 302,893
Svenska Handelsbanken, "A" (Finance) 50,000 685,986
------------
$ 5,745,039
- -----------------------------------------------------------------------------
Total Common Stocks (Identified Cost,
$345,146,832) $378,332,875
- -----------------------------------------------------------------------------
Short-Term Obligations - 2.9%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Dow Chemical, 5.7s, due 12/01/95 $ 4,800 $ 4,800,000
Federal Home Loan Bank, 5.4s, due 12/13/94 5,000 4,991,000
Federal National Mortgage Assn., 5.4s, due
12/05/94 100 99,940
Federal National Mortgage Assn., 5.42s, due
12/23/94 1,500 1,495,032
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized
Cost and Value $ 11,385,972
- -----------------------------------------------------------------------------
Total Investments (Identified Cost,
$356,532,804) $389,718,847
Other Assets, Less Liabilities - (0.7)% (2,606,759)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $387,112,088
- -----------------------------------------------------------------------------
<FN>
<F1> Non-income producing security.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1994
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $356,532,804) $389,718,847
Cash 74,005
Receivable for investments sold 6,578,425
Receivable for Fund shares sold 153,153
Dividends receivable 1,463,934
Other assets 8,178
------------
Total assets $397,996,542
------------
Liabilities:
Payable for investments purchased $ 10,124,544
Payable for Fund shares reacquired 340,238
Payable to affiliates -
Management fee 7,983
Distribution fee 7,930
Shareholder servicing agent fee 2,337
Accrued expenses and other liabilities 401,422
------------
Total liabilities $ 10,884,454
------------
Net assets $387,112,088
------------
Net assets consist of:
Paid-in capital $334,721,579
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 33,186,043
Accumulated undistributed net realized gain on investments
and foreign currency transactions 17,864,814
Accumulated undistributed net investment income 1,339,652
------------
Total $387,112,088
------------
Shares of beneficial interest outstanding 28,958,443
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $2,607,675 / 193,365 shares of beneficial
interest outstanding) $13.49
-----
Offering price per share (100/94.25) $14.31
-----
Class B shares:
Net asset value, redemption price and offering price per share
(net assets of $384,504,413 / 28,765,078 shares of
beneficial interest outstanding) $13.37
-----
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended November 30, 1994
- ------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 10,254,356
Interest 435,096
------------
Total investment income $ 10,689,452
------------
Expenses -
Management fee $ 3,217,779
Trustees' compensation 38,615
Shareholder servicing agent fee (Class A) 1,710
Shareholder servicing agent fee (Class B) 941,368
Distribution and service fee (Class B) 4,290,886
Custodian fee 166,976
Postage 113,109
Printing 110,271
Auditing fees 41,607
Legal fees 12,213
Miscellaneous 361,054
------------
Total expenses $ 9,295,588
------------
Net investment income $ 1,393,864
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 19,900,001
Foreign currency transactions (2,066,143)
------------
Net realized gain on investments and foreign currency
transactions $ 17,833,858
------------
Change in unrealized appreciation (depreciation) -
Investments $(23,930,798)
Translation of assets and liabilities in foreign currencies 2,965
------------
Net unrealized (loss) on investments and foreign currency $(23,927,833)
------------
Net realized and unrealized gain (loss) on investments
and foreign currency $ (6,093,975)
------------
Increase (decrease) in net assets from operations $ (4,700,111)
------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended November 30, 1994 1993
- ------------------------------------------------------------------------------
Increase (decrease) in net
assets:
From operations -
Net investment income $ 1,393,864 $ 467,971
Net realized gain on
investments and foreign
currency transactions 17,833,858 35,471,988
Net unrealized loss on
investments and foreign
currency (23,927,833) (19,685,695)
------------ ------------
Increase (decrease) in net
assets from operations $ (4,700,111) $ 16,254,264
------------ ------------
Distributions declared to
shareholders -
From net investment income
(Class A) $ (961) $ --
From net investment income
(Class B) (95,487) (594,720)
From net realized gain on
investments and foreign
currency transactions (Class A) (19,561) --
From net realized gain on
investments and foreign
currency transactions (Class B) (35,570,518) (18,412,636)
------------ ------------
Total distributions declared
to shareholders $(35,686,527) $(19,007,356)
------------ ------------
Fund share (principal)
transactions -
Net proceeds from sale of
shares $ 66,138,962 $148,569,802
Net asset value of shares
issued to shareholders in
reinvestment of distributions 33,058,598 17,783,370
Cost of shares reacquired (125,984,050) (145,876,247)
------------ ------------
Increase (decrease) in net
assets from Fund share
transactions $(26,786,490) $ 20,476,925
------------ ------------
Total increase (decrease)
in net assets $(67,173,128) $ 17,723,833
Net assets:
At beginning of year 454,285,216 436,561,383
------------ ------------
At end of year (including
accumulated undistributed net
investment income of
$1,339,652 and $376,213,
respectively) $387,112,088 $454,285,216
------------ ------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, 1994 1993<F1> 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
Class A Class B
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $14.75 $14.58 $14.72 $14.83 $13.27
------ ------ ------ ------ ------
Income from investment operations<F4> -
Net investment income $ 0.21 $ 0.03 $ 0.04 $ 0.03 $ 0.02
Net realized and unrealized gain (loss) on
investments (0.25) 0.14 (0.23) 0.50 2.61
------ ------ ------ ------ ------
Total from investment operations $(0.04) $ 0.17 $(0.19) $ 0.53 $ 2.63
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.06) $ -- $ -- <F6> $(0.02) $ --
From net realized gain on investments (1.16) -- (1.16) (0.62) (1.07)
------ ------ ------ ------ ------
Total distributions declared to shareholders $(1.22) $ -- $(1.16) $(0.64) $(1.07)
------ ------ ------ ------ ------
Net asset value - end of period $13.49 $14.75 $13.37 $14.72 $14.83
------ ------ ------ ------ ------
Total return<F5> (0.47)% 5.01%<F3> (1.52)% 3.70% 20.61%
Ratios (to average net assets)/Supplemental data:
Expenses 1.12% 0.91%<F3> 2.18% 2.15% 2.24%
Net investment income 1.59% 1.67%<F3> 0.32% 0.10% 0.18%
Portfolio turnover 50% 70% 50% 70% 65%
Net assets at end of period (000 omitted) $2,608 $196 $384,504 $454,089 $436,561
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended November 30, 1991 1990 1989 1988 1987<F2>
- ----------------------------------------------------------------------------------------------------------
Class B
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $11.29 $12.05 $ 9.38 $ 7.59 $ 7.50
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.10 $ 0.18 $ 0.17 $ 0.12 $ 0.04
Net realized and unrealized gain (loss) on
investments 2.15 (0.75) 2.63 1.76 0.06
------ ------ ------ ------ ------
Total from investment operations $ 2.25 $(0.57) $ 2.80 $ 1.88 $ 0.10
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.14) $(0.19) $(0.13) $(0.09) $(0.01)
From net realized gain on investments (0.13) -- -- -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.27) $(0.19) $(0.13) $(0.09) $(0.01)
------ ------ ------ ------ ------
Net asset value - end of period $13.27 $11.29 $12.05 $ 9.38 $ 7.59
------ ------ ------ ------ ------
Total return<F5> 20.22% (4.80)% 30.11% 24.79% 1.41%<F3>
Ratios (to average net assets)/Supplemental data:
Expenses 2.28% 2.38% 2.46% 2.17% 2.26%<F3>
Net investment income 0.75% 1.56% 1.56% 1.34% 0.36%<F3>
Portfolio turnover 86% 68% 58% 93% 139%
Net assets at end of of period (000 omitted) $317,375 $226,245 $202,861 $130,961 $ 88,471
<FN>
<F1> For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
<F2> For the period from the commencement of investment operations, December 29,
1986 to November 30, 1987.
<F3> Annualized.
<F4> Per share data for the periods subsequent to November 30, 1992 are based on
average shares outstanding.
<F5> 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.
<F6> The per share distribution from net investment income on Class B shares was
$0.00312 per share.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Capital Growth Fund (the Fund) is a non-diversified series of MFS Series
Trust II (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund will invest in financial futures contracts for
hedging and non-hedging purposes to the extent permitted by applicable law.
Should interest rates or securities prices move unexpectedly, the Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At November 30, 1994, the Fund had no securities on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend payments received in additional securities are recorded on the
ex-dividend date in an amount equal to the value of the security on such date.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended November 30, 1994, $333,977 was reclassified from
accumulated undistributed net investment income, $71,997 was reclassified to
accumulated undistributed net realized gain on investments, and $261,983 was
reclassified to paid-in capital due to differences between book and tax
accounting for currency transactions. This change had no effect on the net
assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A and
Class B shares. Class A shares were first offered to the public on September 7,
1993. The two classes of shares differ in their respective shareholder servicing
agent, distribution and service fees. Shareholders of each class also bear
certain expenses that pertain only to that particular class. All shareholders
bear the common expenses of the Fund pro rata, based on the average daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses, including distribution and shareholder service fees.
3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee, computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets, amounted to $3,217,779.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Financial Services, Inc. (FSI)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all its independent Trustees. Included in Trustees' compensation is a
net periodic pension expense of $9,266 for the year ended November 30, 1994.
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$6,476 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A and
Class B shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to FSI of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to FSI wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. Payments will commence under the distribution plan on the
date on which the net assets of the Fund attributable to Class A shares first
equals or exceeds $40 million.
The Class B Distribution Plan provides that the Fund will pay FSI a monthly
distribution fee, equal to 0.75% per annum, and a quarterly service fee of up to
0.25% per annum, of the Fund's average daily net assets attributable to Class B
shares. FSI will pay to securities dealers that enter into a sales agreement
with FSI all or a portion of the service fee attributable to Class B shares. The
service fee is intended to be additional consideration for services rendered by
the dealer with respect to Class B shares. Fees incurred under the distribution
plan during the year ended November 30, 1994 were 1.00% of average daily net
assets attributable to Class B shares on an annualized basis and amounted to
$4,290,886 (of which FSI retained $104,640).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge is imposed on shareholder redemptions of Class B shares in the
event of a share redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended November 30, 1994 were $42 and $748,310 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$1,710 and $941,368 for Class A and Class B shares, respectively, for its
services as shareholder servicing agent. The fee is calculated as a percentage
of the average daily net assets of each class of shares at an effective annual
rate of up to 0.15% and up to 0.22% attributable to Class A and Class B shares,
respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, aggregated $215,989,783 and $271,677,798, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $356,787,488
-----------
Gross unrealized appreciation $ 44,308,948
Gross unrealized depreciation (11,377,589)
-----------
Net unrealized appreciation $ 32,931,359
-----------
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
Year Ended November 30, 1994 1993<F1>
---------------------- ------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------
Shares sold 231,629 $ 3,234,603 15,645 $ 233,128
Shares issued to
shareholders in
reinvestment of
distributions 1,363 18,815 -- --
Shares reacquired (52,922) (732,165) (2,350) (34,938)
Net increase 180,070 $ 2,521,253 13,295 $ 198,190
---------- ------------ ----------- ------------
<F1> For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
Class B Shares
Year Ended November 30, 1994 1993
--------------------- -------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------
Shares sold 4,507,115 $ 62,904,359 10,188,081 $ 148,336,674
Shares issued to
shareholders in
reinvestment of
distributions 2,390,715 33,039,783 1,240,974 17,783,370
Shares reacquired (8,988,227) (125,251,885) (10,016,076) (145,841,309)
---------- ------------ ----------- ------------
Net increase
(decrease) (2,090,397) $ (29,307,743) 1,412,979 $ 20,278,735
---------- ------------ ----------- ------------
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended November 30, 1994 was $6,439.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust II and
Shareholders of MFS Capital Growth Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Capital Growth Fund (one of the series
constituting MFS Series Trust II) as of November 30, 1994, the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended November 30, 1994 and 1993, and the financial highlights for
each of the years in the eight-year period ended November 30, 1994. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
November 30, 1994 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Capital Growth
Fund at November 30, 1994, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 3, 1995
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
PROSPECTUS
April 1, 1995
MFS(R) INTERMEDIATE INCOME FUND Class A Shares of
Beneficial Interest
(A member of the MFS Family of Funds(R)) Class B Shares of
Beneficial Interest
- ------------------------------------------------------------------
- --------------
Page
- ---
1. Expense Summary ...............................................
2
2. The Fund ......................................................
3
3. Condensed Financial Information ...............................
4
4. Investment Objective and Policies .............................
4
5. Investment Techniques .........................................
9
6. Management of the Fund ........................................
15
7. Information Concerning Shares of the Fund .....................
16
Purchases ..................................................
16
Exchanges ..................................................
21
Redemptions and Repurchases ................................
22
Distribution Plans .........................................
24
Distributions ..............................................
26
Tax Status .................................................
26
Net Asset Value ............................................
27
Description of Shares, Voting Rights and Liabilities .......
27
Performance Information ....................................
27
8. Shareholder Services ..........................................
28
Appendix A ....................................................
30
Appendix B ....................................................
31
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE
MFS INTERMEDIATE INCOME FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-
5000
The investment objective of MFS Intermediate Income Fund (the
"Fund") is to
preserve capital and provide high current income. The Fund is a
non- diversified
series of MFS Series Trust II (the "Trust"), an open-end
management investment
company. BECAUSE OF THE POLICIES OF THE MFS INTERMEDIATE
INCOME FUND OF
INVESTING TO A SIGNIFICANT EXTENT IN FOREIGN SECURITIES,
INVESTMENTS IN THIS
FUND MAY BE SUBJECT TO A GREATER DEGREE OF RISK THAN
INVESTMENTS IN OTHER
INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN DOMESTIC
SECURITIES (see
"Investment Objective and Policies"). The minimum initial
investment generally
is $1,000 per account (see "Purchases"). The Fund's
investment adviser and
distributor are Massachusetts Financial Services Company
("MFS" or the
"Adviser") and MFS Fund Distributors, Inc. ("MFD"), respectively,
both of which
are located at 500 Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY.
This Prospectus sets forth concisely the information concerning
the Trust and
Fund that a prospective investor ought to know before investing.
The Trust, on
behalf of the Fund, has filed with the Securities and Exchange
Commission (the
"SEC") a Statement of Additional Information, dated April 1,
1995, which
contains more detailed information about the Trust and the
Fund and is
incorporated into this Prospectus by reference. See page 30
for a further
description of the information set forth in the Statement
of Additional
Information. A copy of the Statement of Additional Information
may be obtained
without charge by contacting the Shareholder Servicing Agent (see
back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
<TABLE>
<CAPTION>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
CLASS A CLASS B
- ------- -------
<S>
<C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a
percentage of offering price)
......................................... 4.75%
0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original
purchase price or redemption proceeds, as applicable)
................. See Below<F1> 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees
.........................................................
0.76% 0.76%
Rule 12b-1 Fees (after applicable fee reduction)
........................ 0.00%<F2> 1.00%<F3>
Other Expenses
..........................................................
0.42% 0.45%
- ---- ----
Total Operating Expenses (after applicable fee reduction)
............... 1.18% 2.21%
- ---------
<FN>
<F1>Purchases of $1 million or more are not subject to an
initial sales charge; however, a contingent
deferred sales charge (a "CDSC") of 1% will be imposed
on such purchases in the event of certain
redemption transactions within 12 months following such
purchases (see "Purchases").
<F2>The Fund has adopted a Distribution Plan for its Class A
shares in accordance with Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940
Act"), which provides that it will pay
distribution/ service fees aggregating up to (but not
necessarily all of) 0.35% per annum of the average
daily net assets attributable to the Class A shares. After a
substantial period of time, distribution
expenses paid under this Plan, together with the initial
sales charge, may total more than the maximum
sales charge that would have been permissible if imposed
entirely as an initial sales charge. Rule 12b-1
fees will become payable by the Fund when the Fund's net
assets attributable to Class A shares first
equal or exceed $40,000,000, at which time the Fund's
distributor intends to waive payment of 0.10%
payable under the Class A Distribution Plan (see "Distribution
Plans").
<F3>The Fund has adopted a Distribution Plan for its Class B
shares in accordance with Rule 12b-1 under the
1940 Act, which provides that it will pay distribution/service
fees aggregating up to 1.00% per annum of
the average daily net assets attributable to the Class B
shares (see "Distribution Plans"). After a
substantial period of time, distribution expenses paid under
this Plan, together with any CDSC, may total
more than the maximum sales charge that would have been
permissible if imposed entirely as an initial
sales charge.
</FN>
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of
expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b)
redemption at the
end of each of the time periods indicated (unless otherwise
noted):
PERIOD CLASS A
CLASS B
------ ------- ---------
- ------------
(1)
1 year ....................... $ 59 $ 62
$ 22
3 years ...................... 83 99
69
5 years ...................... 109 138
118
10 years ...................... 184 228(2)
228(2)
- ---------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately
eight years after
purchase; therefore, years nine and ten reflect Class A
expenses.
The purpose of the expense table above is to assist
investors in
understanding the various costs and expenses that a shareholder of
the Fund will
bear directly or indirectly. More complete descriptions of the
following Fund
expenses are set forth in the following sections: (i) varying
sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs --
"Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1
(i.e., distribution
plan) fees -- "Distribution Plans".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE
GREATER OR LESS
THAN THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-
end management
investment company which was organized as a business trust under
the laws of The
Commonwealth of Massachusetts on July 30, 1986. The Trust
presently consists of
four series of shares, each of which represents a portfolio
with separate
investment policies. Shares of the Fund are continuously sold to
the public and
the Fund then uses the proceeds to buy securities for its
portfolio. Two classes
of shares of the Fund currently are offered to the general
public. Class A
shares are offered at net asset value plus an initial sales charge
(or a CDSC in
the case of certain purchases of $1 million or more) and are
subject to a
Distribution Plan, providing for a distribution and service fee.
Class B shares
are offered at net asset value without an initial sales charge
but subject to a
CDSC and a Distribution Plan providing for a distribution and
service fee which
are greater than the Class A distribution and service fee. Class
B shares will
convert to Class A shares approximately eight years after
purchase.
The Trust's Board of Trustees provides broad supervision over the
affairs of the
Fund. The Adviser is responsible for the management of the Fund's
assets and the
officers of the Trust are responsible for the Fund's
operations. The Adviser
manages the portfolio from day to day in accordance with the
Fund's investment
objective and policies. A majority of the Trustees are not
affiliated with the
Adviser. The selection of investments and the way they are managed
depend on the
conditions and trends in the economies of the various countries
of the world,
their financial markets and the relationship of their
currencies to the U.S.
dollar. The Fund also offers to buy back (redeem) its
shares from its
shareholders at any time at net asset value, less any applicable
CDSC.
<PAGE>
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with
the financial
statements included in the Fund's Annual Report to
shareholders which are
incorporated by reference into the Statement of Additional
Information in
reliance upon the report of Deloitte & Touche LLP, independent
certified public
accountants, as experts in accounting and auditing.
<TABLE>
<CAPTION>
FINANCIAL
HIGHLIGHTS
Class A and
Class B Shares
YEAR ENDED NOVEMBER 30, 1994 1993<F5>
1994 1993 1992 1991 1990 1989 1988<F4>
-----------------------------------------------------------------
- ---------------------------------------------------------------
Class A
Class B
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
<S> <C> <C>
<C> <C> <C> <C> <C> <C> <C>
Net asset value --
beginning of period .................... $ 8.94 $ 9.11
$ 8.93 $ 8.88 $ 9.31 $ 9.23 $ 9.50 $ 9.77 $ 9.47
------ ------
- ------ ------ ------ ------ ------ ------ ------
Income from investment operations --
Net investment income<F3> $ 0.59 $ 0.11
$ 0.47 $ 0.47 $ 0.62 $ 0.58 $ 0.59 $ 0.68 $ 0.35
Net realized and unrealized gain (loss)
on investments (0.95) (0.17)
(0.92) 0.26 (0.26) 0.32 (0.02) (0.08) 0.10
------ ------
- ------ ------ ------ ------ ------ ------ ------
Total from investment operations $(0.36) $(0.06)
$(0.45) $ 0.73 $ 0.36 $ 0.90 $ 0.57 $ 0.60 $ 0.45
Less distributions declared to shareholders --
From net investment income ........... -- $(0.09)
- -- $(0.45) $(0.57) $(0.56) $(0.45) $(0.85) $(0.12)
From net realized gain on investments . -- (0.02)
- -- (0.16) (0.15) (0.14) -- (0.02) (0.03)
From paid-in capital .................. -- --
- -- -- (0.07) (0.12) (0.39) -- --
Tax return of capital ................. (0.62) --
(0.52) (0.07) -- -- -- -- --
------ ------
- ------ ------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders ... $(0.62) $(0.11)
$(0.52) $(0.68) $(0.79) $(0.82) $(0.84) $(0.87) $(0.15)
------ ------
- ------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period ........ $ 7.96 $ 8.94
$ 7.96 $ 8.93 $ 8.88 $ 9.31 $ 9.23 $ 9.50 $ 9.77
====== ======
====== ====== ====== ====== ====== ====== ======
TOTAL RETURN<F6> ........................ (4.27)%
(0.66)%<F2>(5.24)% 8.42% 3.93% 10.30% 6.59% 6.60%
14.21%<F1>
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses .............................. 1.18% 1.22%<F1>
2.22% 2.15% 2.20% 2.24% 2.33% 2.47% 2.79%<F1>
Net investment income ................. 7.10% 6.43%<F1>
5.60% 5.19% 6.70% 6.65% 6.80% 7.13% 17.14%<F1>
Portfolio turnover ...................... 211% 376%
211% 376% 372% 603% 579% 433% 120%
Net assets at end of period (000 omitted) $3,432 $ 258
$292,619 $466,955 $347,588 $196,753 $126,245 $75,039 $30,858
<FN>
<F1>Annualized.
<F2>Not annualized.
<F3>Per share data for periods subsequent to November 30, 1992 is
based on average shares outstanding.
<F4>For the period from the commencement of investment operations,
August 1, 1988 to November 30, 1988.
<F5>For the period from the commencement of offering of Class A
shares, September 7, 1993 to November 30, 1993.
<F6>Total returns for Class A shares do not include the sales
charge. If the sales charge had been included, the results would
have
been lower.
</FN>
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to preserve capital and provide high current
income.
The Fund seeks to achieve its objectives by investing in
securities that are
issued or guaranteed as to principal and interest by the U.S.
Government, its
agencies, authorities or instrumentalities ("U.S. Government
Securities") and in
obligations issued or guaranteed by a foreign government or any of
its political
subdivisions, authorities, agencies or instrumentalities
("Foreign Government
Securities"). The Fund will maintain an average weighted
portfolio maturity of
approximately seven years or less and will invest
substantially all of its
assets in securities with remaining maturities less than or
equal to 10 years.
Under normal market conditions, the Fund's average weighted
portfolio maturity
will not be less than three years. The Adviser believes that this
strategy will
enable the Fund to preserve capital while seeking high
current income.
Shorter-term U.S. and Foreign Government Securities generally
are more stable
and less susceptible to principal loss than longer-term
securities. While
shorter-term securities in most cases offer lower yields than
securities with
longer maturities, the Fund will seek to enhance income by
writing options on
U.S. and Foreign Government Securities. Option writing can result
in the loss of
principal under certain market conditions. Although the percentage
of the Fund's
assets invested in Foreign Government Securities will vary
depending on the
state of the economies of the principal countries around the
world, their
financial markets and the relationship of their currencies to
the U.S. dollar,
under normal conditions the Fund's portfolio is expected
to be globally
diversified.
For purposes of the foregoing investment policy, securities
having a certain
maturity will be deemed to include securities with an equivalent
"duration" of
such securities. "Duration" is a commonly used measure of the
longevity of a
debt instrument that takes into account the full stream of
payments received on
a debt instrument, including both interest and principal
payments, based on
their present values. A debt instrument's duration is derived
by discounting
principal and interest payments to their present value using the
instrument's
current yield to maturity and taking the dollar-weighted
average time until
those payments will be received. Contractual rights to dispose
of a security,
call options and prepayment assumptions may be considered
in calculating
duration and average maturity because such rights limit the
period during which
the Fund bears a market risk with respect to the security.
The U.S. Government Securities in which the Fund intends to
invest include (i)
U.S. Treasury obligations, which differ only in their interest
rates, maturities
and times of issuance: U.S. Treasury bills (maturities of one
year or less);
U.S. Treasury notes (maturities of one to 10 years); and
U.S.Treasury bonds
(generally original maturities of greater than 10 years),
all of which are
backed by the full faith and credit of the United States; and
(ii) obligations
issued or guaranteed by U.S. Government agencies,
authorities or
instrumentalities, some of which are backed by the full faith and
credit of the
U.S. Treasury, e.g., direct pass-through certificates of the
Government National
Mortgage Association (the "GNMA"); some of which are supported
by the right of
the issuer to borrow from the U.S. Government, e.g., obligations
of Federal Home
Loan Banks; and some of which are backed only by the credit
of the issuer
itself, e.g., obligations of the Student Loan Marketing
Association. For a
description of obligations issued by U.S. Government agencies,
authorities or
instrumentalities, see Appendix A to this Prospectus.
U.S. Government Securities do not generally involve the credit
risks associated
with other types of interest bearing securities, although, as
a result, the
yields available from U.S. Government Securities are generally
lower than the
yields available from other fixed income securities. Like other
interest bearing
securities, however, the values of U.S. Government Securities
change as interest
rates fluctuate.
The Fund may invest up to 50% of its total assets in
Foreign Government
Securities of issuers considered stable by the Adviser. Such
securities will be
rated using Lehman Brothers Sovereign Credit Ratings which reflect
BBB or better
status by Standard & Poor's Ratings Group ("S&P") or Baa or
better by Moody's
Investors Service, Inc. ("Moody's") or, if unrated will be
determined by the
Adviser to be comparable credit quality. The Fund's portfolio,
under normal
conditions, will include securities of a number of foreign
countries.The
percentage of the Fund's assets invested in Foreign Government
Securities will
vary depending on the relative yields of such securities, the
economies of the
countries in which the investments are made and such
countries' financial
markets, the interest rate climate of such countries and the
relationship of
such countries' currencies to the U.S. dollar. Investments in
Foreign Government
Securities and currency will be evaluated on the basis of
fundamental economic
criteria (e.g., relative inflation levels and trends, growth
rate forecasts,
balance of payments status and economic policies) as well as
technical and
political data. In addition to the foregoing, interest rates
are evaluated on
the basis of differentials or anomalies that may exist
between different
countries. The Foreign Government Securities in which the Fund
intends to invest
will generally consist of obligations supported by national, state
or provincial
governments or similar political subdivisions. The Fund may
hold foreign
currency for hedging purposes to protect against declines in
the U.S. dollar
value of Foreign Government Securities held by the Fund and
against increases in
the U.S. dollar value of the Foreign Government Securities which
the Fund might
purchase. The Fund may also hold foreign currency for other
purposes. (See
"Additional Risk Factors" below).
The Fund may invest up to 10% of its assets in countries or
regions with
relatively low gross national product per capita compared to the
world's major
economies, and in countries or regions with the potential for
rapid economic
growth (emerging markets). Emerging markets will include any
country: (i) having
an "emerging stock market" as defined by the International
Finance Corporation;
(ii) with low-to-middle-income economies according to the
International Bank for
Reconstruction and Development (the "World Bank"); (iii) listed
in World Bank
publications as developing; or (iv) determined by the Adviser to
be an emerging
market as defined above.
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, Costa Rica,
Mexico, Nigeria,
the Philippines, 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 floating-rate bonds, are generally
collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same
maturity as the
Brady 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
payaments; 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 should be viewed as speculative.
Under normal circumstances, at least 65% of the assets of
the Fund will be
invested in income producing securities.
The Fund may also purchase interests in trusts or other entities
representing
interests in U.S. Government Securities or Foreign Government
Securities or
holding U.S. Government Securities or Foreign Government
Securities in amounts
sufficient to cover all payments due from such entities. The Fund
may enter into
mortgage "dollar roll" transactions (see "Investment
Techniques -- Mortgage
Dollar Roll Transactions" below). The securities in which the
Fund may invest
also include zero coupon bonds. The Fund may also invest in
collateralized
mortgage obligations, multiclass pass-through securities
and stripped
mortgage-backed securities. (See "Investment Techniques -- Zero
Coupon Bonds",
"-- Collateralized Mortgage Obligations and Multiclass Pass-
Through Securities"
and "-- Stripped Mortgage-Backed Securities" below). The Fund
may purchase
portfolio securities on a "when-issued" or on a "forward
delivery" basis (see
"Investment Techniques -- When-Issued Securities" below). In
addition, the Fund
may write covered call and put options and purchase call and put
options on U.S.
Government Securities as well as write covered call and put
"yield curve"
options and purchase call and put "yield curve" options on the
"spread" between
two U.S. Government Securities in an effort to increase current
income and for
hedging purposes (see "Investment Techniques -- Options" below).
The Fund may
also purchase and sell interest rate futures contracts on
U.S. Government
Securities or indexes of such securities and may write and
purchase options on
such futures contracts for hedging purposes and for non-
hedging purposes,
subject to applicable law (see "Investment Techniques -- Futures
Contracts and
Options on Futures Contracts" below).
For hedging purposes, the Fund may also enter into forward
foreign currency
exchange contracts, futures contracts on foreign currencies,
options on such
futures contracts and options on foreign currencies (see
"Investment Techniques
- -- Futures Contracts and Options on Futures Contracts", "--
Forward Contracts on
Foreign Currency and Precious Metals and Other Natural
Resources" and "--
Options on Foreign Currencies" below). In addition, the Fund may
enter into such
transactions (except for options on foreign currencies) for
other than hedging
purposes, including transactions entered into for the purpose of
profiting from
anticipated changes in foreign currency exchange rates.
ADDITIONAL INFORMATION AS TO INVESTMENT OBJECTIVE AND POLICIES
FIXED INCOME SECURITIES -- When and if available, the Fund may
purchase fixed
income securities at a discount from face value. However, the
Fund does not
intend to hold such securities to maturity for the purpose
of achieving
potential capital gains, unless current yields on these
securities remain
attractive.
ADDITIONAL RISK FACTORS -- The net asset value of the shares
of an open-end
investment company which may invest in fixed income securities
changes as the
general levels of interest rates fluctuate. When interest rates
decline, the
value of a fixed income portfolio can be expected to rise.
Conversely, when
interest rates rise, the value of a fixed income portfolio can
be expected to
decline.
Although changes in the value of securities subsequent to their
acquisition are
reflected in the net asset value of shares of the Fund, such
changes will not
affect the income received by the Fund from such securities.
However, the
dividends paid by the Fund, if any, will increase or decrease in
relation to the
income received by the Fund from its investments, which would
in any case be
reduced by the Fund's expenses before it is distributed to
shareholders. The
Fund seeks to maintain a relatively high, stable dividend. At
times, a portion
of the Fund's dividend may constitute a return of capital.
In addition, the use of options, futures contracts,
options on futures
contracts, forward contracts and options on foreign currencies
(see "Investment
Techniques" below) may result in the loss of principal,
particularly where such
instruments are traded for other than hedging purposes (e.g., to
enhance current
yield).
The Fund intends to maintain a portfolio with a significant
investment in
securities of non-U.S. issuers. Investing in foreign securities
or on foreign
exchanges may present a greater degree of risk than investing
in domestic
issuers. These risks include changes in currency rates,
exchange control
regulations, governmental administration, economic or monetary
policy (in this
country or abroad), war or expropriation. In particular, the
dollar value of
portfolio securities of non-U.S. issuers fluctuates with changes
in market and
economic conditions abroad and with changes in relative
currency values (when
the value of the dollar increases as compared to a foreign
currency, the dollar
value of a foreign-denominated security decreases, and vice
versa). Costs may be
incurred in connection with conversions between various
currencies. Special
considerations may also include more limited information about
foreign issuers,
higher brokerage costs, different accounting standards and
thinner trading
markets. Foreign securities markets may also be less liquid,
more volatile and
less subject to government supervision than in the United States.
Investments in
foreign countries could be affected by other factors including
confiscatory
taxation and potential difficulties in enforcing contractual
obligations and
could be subject to extended settlement periods. Therefore, an
investment in
shares of the Fund may be subject to a greater degree of risk
than investments
in other investment companies which invest exclusively in domestic
securities.
As a result of its investments in foreign securities, the
Fund may receive
interest or dividend payments, or the proceeds of the sale or
redemption of such
securities, in the foreign currencies in which such securities
are denominated.
In that event, the Fund may promptly convert such currencies into
dollars at the
then current exchange rate. Under certain circumstances, however,
such as where
the Adviser believes that the applicable exchange rate is
unfavorable at the
time the currencies are received or the Adviser anticipates,
for any other
reason, that the exchange rate will improve, the Fund may hold
such currencies
for an indefinite period of time.
In addition, the Fund may be required to receive delivery
of the foreign
currencies underlying options on foreign currencies it has entered
into, and the
Fund may be required to receive delivery of the foreign
currency underlying
forward foreign currency contracts it has entered into. This
could occur, for
example, if an option written by the Fund is exercised or the
Fund is unable to
close out a forward contract it has entered into. The Fund may
also hold foreign
currency in anticipation of purchasing foreign securities. The
Fund may also
elect to take delivery of the currencies underlying options or
forward contracts
if, in the judgment of the Adviser, it is in the best interest of
the Fund to do
so. In such instances as well, the Fund may promptly convert
the foreign
currencies to dollars at the then current exchange rate, or
may hold such
currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take
advantage of
favorable movements in the applicable exchange rate, it also
exposes the Fund to
risk of loss if such rates move in a direction adverse to the
Fund's position.
Such losses could reduce any profits or increase any losses
sustained by the
Fund from the sale or redemption of securities, and could
reduce the dollar
value of interest of securities, and could reduce the dollar
value of interest
or dividend payments received. In addition, the holding of
currencies could
adversely affect the Fund's profit or loss on currency
options or forward
contracts, as well as its hedging strategies.
The risks of investing in foreign securities may be intensified
in the case of
investments in emerging markets. Securities of many issuers in
emerging markets
may be less liquid and more volatile than securities of
comparable domestic
issuers. Emerging markets also have different clearance
and settlement
procedures, and in certain markets there have been times when
settlements have
been unable to keep pace with the volume of securities
transactions, making it
difficult to conduct such transactions. Delays in settlement
could result in
temporary periods when a portion of the assets of the Fund is
uninvested and no
return is earned thereon. The inability of the Fund to make
intended security
purchases due to settlement problems could cause the Fund to
miss attractive
investment opportunities. Inability to dispose of portfolio
securities due to
settlement problems could result either in losses to the Fund due
to subsequent
declines in value of the portfolio security or, if the Fund has
entered into a
contract to sell the security, in possible liability to the
purchaser. Certain
markets may require payment for securities before delivery.
Securities prices in
emerging markets can be significantly more volatile than in the
more developed
nations of the world, reflecting the greater uncertainties of
investing in less
established markets and economies. In particular, countries
with emerging
markets may have relatively unstable governments, present
the risk of
nationalization of businesses, restrictions on foreign
ownership, or
prohibitions of repatriation of assets, and may have less
protection of property
rights than more developed countries. The economies of countries
with emerging
markets may be predominantly based on only a few industries,
may be highly
vulnerable to changes in local or global trade conditions, and
may suffer from
extreme and volatile debt burdens or inflation rates. Local
securities markets
may trade a small number of securities and may be unable to
respond effectively
to increases in trading volume, potentially making prompt
liquidation of
substantial holdings difficult or impossible at times.
Securities of issuers
located in countries with emerging markets may have limited
marketability and
may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for
the repatriation
of investment income, capital or the proceeds of sales of
securities by foreign
investors. In addition, if a deterioration occurs in an
emerging market's
balance of payments or for other reasons, a country could
impose temporary
restrictions on foreign capital remittances. The Fund could
be adversely
affected by delays in, or a refusal to grant, any required
governmental approval
for repatriation of capital, as well as by the application to
the Fund of any
restrictions or investments.
Investment in certain foreign emerging market debt obligations may
be restricted
or controlled to varying degrees. These restrictions or
controls may at times
preclude investment in certain foreign emerging market debt
obligations and
increase the expenses of the Fund.
See the Statement of Additional Information for further
discussion of foreign
securities and the holding of foreign currency as well as the
associated risks.
The Fund has registered as a "non-diversified" investment
company. As a result,
the Fund is limited as to the percentage of its assets that may
be invested in
the securities of any one issuer only by its own investment
restrictions and the
diversification requirements of the Internal Revenue Code of
1986, as amended
(the "Code"). U.S. Government Securities are not subject to
any investment
limitation. Since the Fund may invest a relatively high percentage
of its assets
in the obligations of a limited number of issuers, the
Fund may be more
susceptible to any single economic, political or regulatory
occurrence.
Given the above average investment risk inherent in the Fund,
investment in
shares of the Fund should not be considered a complete
investment program and
may not be appropriate for all investors.
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES -- During
periods of unusual
market conditions when the Adviser believes that investing
for defensive
purposes is appropriate, or in order to meet anticipated
redemption requests, a
large portion or all of the assets of the Fund may be invested
in cash or cash
equivalents including, but not limited to, obligations of banks
with assets of
$1 billion or more (including certificates of deposit, bankers'
acceptances and
repurchase agreements), commercial paper, short-term notes,
obligations issued
or guaranteed by the U.S. Government or any of its agencies,
authorities or
instrumentalities and related repurchase agreements. See
Appendix B to this
Prospectus for a description of certain short-term investments.
5. INVESTMENT TECHNIQUES
LENDING OF SECURITIES: The Fund may make loans of its portfolio
securities. Such
loans will usually be made only to member banks of the Federal
Reserve System
and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the
"Exchange") and would be required to be secured continuously by
collateral in
cash, cash equivalents or U.S. Government Securities
maintained on a current
basis at an amount at least equal to the market value of the
securities loaned.
The Fund would continue to collect the equivalent of the
interest on the
securities loaned and would also receive either interest (through
investment of
cash collateral) or a fee (if the collateral is U S. Government
Securities).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase
agreements in order to
earn additional income on available cash or as a temporary
defensive measure.
Under a repurchase agreement, the Fund acquires securities
subject to the
seller's agreement to repurchase at a specified time and price.
If the seller
becomes subject to a proceeding under the bankruptcy laws or
its assets are
otherwise subject to a stay order, the Fund's right to liquidate
the securities
may be restricted (during which time the value of the securities
could decline).
As discussed in the Statement of Additional Information, the
Fund has adopted
certain procedures which are intended to minimize any such risk.
RESTRICTED SECURITIES: The Fund may also purchase securities
that are not
registered under the Securities Act of 1933, as amended (the
"1933 Act")
("restricted securities"), including those that can be
offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933
Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based
upon a continuing
review of the trading markets for the specific Rule 144A security,
whether such
security is illiquid and thus subject to the Fund's limitation on
investing not
more than 15% of its net assets in illiquid investments, or
liquid and thus not
subject to such limitation. The Board of Trustees has adopted
guidelines and
delegated to the Adviser the daily function of determining and
monitoring the
liquidity of Rule 144A securities. The Board, however, will
retain sufficient
oversight and be ultimately responsible for the determinations.
The Board will
carefully monitor the Fund's investments in Rule 144A
securities, focusing on
such important factors, among others, as valuation, liquidity
and availability
of information. This investment practice could have the effect of
increasing the
level of illiquidity in the Fund to the extent that qualified
institutional
buyers become for a time uninterested in purchasing Rule 144A
securities held in
the Fund's portfolio. Subject to the Fund's 15% limitation on
investments in
illiquid investments, the Fund may also invest in restricted
securities that may
not be sold under Rule 144A, which presents certain risks. As a
result, the Fund
might not be able to sell these securities when the Adviser
wishes to do so, or
might have to sell them at less than fair value. In addition,
market quotations
are less readily available. Therefore, the judgment of the
Adviser may at times
play a greater role in valuing these securities than in the case
of unrestricted
securities.
MORTGAGE DOLLAR ROLL TRANSACTIONS: The Fund may enter into
mortgage "dollar
roll" transactions with selected banks and broker-dealers
pursuant to which the
Fund sells mortgage-backed securities for delivery in the
future (generally
within 30 days) and simultaneously contracts to repurchase
substantially similar
(same type, coupon and maturity) securities on a specified future
date. The Fund
will only enter into covered rolls. A "covered roll" is a
specific type of
dollar roll for which there is an offsetting cash position or a
cash equivalent
security position which matures on or before the forward
settlement date of the
dollar roll transaction.
WHEN-ISSUED SECURITIES: In order to help ensure the
availability of suitable
securities for its portfolio, the Fund may purchase
securities on a "when-
issued" or on a "forward delivery" basis, which means that the
obligations will
be delivered to the Fund at a future date usually beyond
customary settlement
time. It is expected that, under normal circumstances, the
Fund will take
delivery of such securities. In general, the Fund does
not pay for the
securities until received and does not start earning interest on
the obligations
until the contractual settlement date. While awaiting
delivery of the
obligations purchased on such bases, the Fund will establish
a segregated
account consisting of cash, short-term money market instruments
or high quality
debt securities equal to the amount of the commitments to purchase
"when-issued"
securities. See the Statement of Additional Information.
ZERO COUPON BONDS: The Fund may invest in zero coupon bonds.
Zero coupon bonds
are debt obligations which are issued or purchased at a
significant discount
from face value. The discount approximates the total amount
of interest the
bonds will accrue and compound over the period until maturity.
Zero coupon bonds
do not require the periodic payment of interest. Such
investments benefit the
issuer by mitigating its need for cash to meet debt service, but
also require a
higher rate of return to attract investors who are willing to
defer receipt of
such cash. Such investments may experience greater volatility
in market value
due to changes in interest rates than debt obligations which
make regular
payments of interest. The Fund will accrue income on such
investments for tax
and accounting purposes, as required, which is distributable to
shareholders and
which, because no cash is received at the time of accrual,
may require the
liquidation of other portfolio securities to satisfy the Fund's
distribution
obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The
Fund may invest in Collateralized Mortgage Obligations ("CMOs"),
which are debt
obligations collateralized by mortgage loans or mortgage
pass-through
securities. Typically, CMOs are collateralized by certificates
issued by the
GNMA, the Federal National Mortgage Association or the
Federal Home Loan
Mortgage Corporation but also may be collateralized by whole
loans or private
mortgage pass-through securities (such as collateral
collectively hereinafter
referred to as "Mortgage Assets"). The Fund may also invest a
portion of its
assets in multiclass pass-through securities which are
interests in a trust
composed of Mortgage Assets. The Mortgage Assets must be issued or
guaranteed by
the U.S. Government, its agencies, authorities or
instrumentalities. Payments of
principal of and interest on the Mortgage Assets, and any
reinvestment income
thereon, provide the funds to pay debt service on the CMOs or
make scheduled
distributions on the multiclass pass-through securities. In a
CMO, a series of
bonds or certificates is usually issued in multiple classes
with different
maturities. Each class of CMOs, often referred to as a "tranche",
is issued at a
specific fixed or floating coupon rate and has a stated
maturity or final
distribution date. Principal prepayments on the Mortgage Assets
may cause the
CMOs to be retired substantially earlier than their stated
maturities or final
distribution dates, resulting in a loss of all or part of the
premium if any has
been paid. Interest is paid or accrues on all classes of CMOs
on a monthly,
quarterly or semiannual basis. The principal of and interest
on the Mortgage
Assets may be allocated among the several classes of a
series of a CMO in
innumerable ways. In a common structure, payments of principal,
including any
principal prepayments, on Mortgage Assets are applied to the
classes of the
series of a CMO in the order of their respective stated
maturities or final
distribution dates, so that no payment of principal will be made
on any class of
CMOs until all other classes having an earlier stated
maturity or final
distribution date have been paid in full. Certain CMOs
may be stripped
(securities which provide only the principal or interest
factor of the
underlying security). See "Stripped Mortgage-Backed Securities" in
the Statement
of Additional Information for a discussion of the risks of
investing in these
stripped securities and of investing in classes consisting
primarily of interest
payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned
Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of
principal on each payment date to more than one class. These
simultaneous
payments are taken into account in calculating the stated maturity
date or final
distribution date of each class, which, as with other CMO
structures, must be
retired by its stated maturity date or final distribution
date, but may be
retired earlier. PAC Bonds generally require payments of a
specified amount of
principal on each payment date. PAC Bonds are always parallel pay
CMOs with the
required principal payment on such securities having the highest
priority after
interest has been paid to all classes. For a further
description of CMOs,
parallel pay CMOs and PAC Bonds and the risks related to
transactions therein,
see the Statement of Additional Information.
INDEXED SECURITIES: The Fund may invest in indexed securities
whose value is
linked to foreign currencies, interest rates, commodities,
indices or other
financial indicators. Most indexed securities are short to
intermediate term
fixed-income securities whose values at maturity or interest
rates rise or fall
according to the change in one or more specified underlying
instruments. Indexed
securities may include securities that have embedded swap
agreements (see "Swaps
and Related Transactions"). Indexed securities may be positively
or negatively
indexed (i.e., their value may increase or decrease if the
underlying instrument
appreciates), and may have return characteristics similar to
direct investments
in the underlying instrument or to one or more options on
the underlying
instrument. Indexed securities may be more volatile than
the underlying
instrument itself.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion
of its assets
in stripped mortgage-backed securities ("SMBS"), which are
derivative multiclass
mortgage securities usually structured with two classes that
receive different
proportions of interest and principal distributions from an
underlying pool of
mortgage assets. For a further description of SMBS and the
risks related to
transactions therein, see the Statement of Additional Information.
SWAPS AND RELATED TRANSACTIONS -- As one way of managing its
exposure to
different types of investments, the Fund may enter into
interest rate swaps,
currency swaps and other types of available swap agreements,
such as caps,
collars and floors. Swaps involve the exchange by the Fund with
another party of
cash payments based upon different interest rate indexes,
currencies, and other
prices or rates, such as the value of mortgage prepayment rates.
For example, in
the typical interest rate swap, the Fund might exchange a
sequence of cash
payments based on a floating rate index for cash payments based on
a fixed rate.
Payments made by both parties to a swap transaction are based
on a principal
amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In
a typical cap
or floor agreement, one party agrees to make payments only
under specified
circumstances, usually in return for payment of a fee by the
counterparty. For
example, the purchase of an interest rate cap entitles the buyer,
to the extent
that a specified index exceeds a predetermined interest
rate, to receive
payments of interest on a contractually-based principal
amount from the
counterparty selling such interest rate cap. The sale of an
interest rate floor
obligates the seller to make payments to the extent that a
specified interest
rate falls below an agreed-upon level. A collar arrangement
combines elements of
buying a cap and selling a floor.
Swap agreements will tend to shift a Fund investment exposure
from one type of
investment to another. For example, if a Fund agreed to
exchange payments in
dollars for payments in foreign currency, in each case based on
a fixed rate,
the swap agreement would tend to decrease a Fund's exposure to
U.S. interest
rates and increase its exposure to foreign currency and interest
rates. Caps and
floors have an effect similar to buying or writing options.
Depending on how
they are used, swap agreements may increase or decrease the
overall volatility
of a Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that
typically involve a
small investment of cash relative to the magnitude of risks
assumed. As a
result, swaps can be highly volatile and may have a
considerable impact on a
Fund's performance. Swap agreements are subject to risks
related to the
counterparty's ability to perform, and may decline in
value if the
counterparty's creditworthiness deteriorates. A Fund may also
suffer losses if
it is unable to terminate outstanding swap agreements or
reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities
which involve
certain risks. See the Statement of Additional Information
for further
discussion on, and the risks involved, in, these activities.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS: The Fund
may enter into
transactions in options, futures and forward contracts on
a variety of
instruments and indices, in order to protect against declines
in the value of
portfolio securities or increases in the cost of securities or
other assets to
be acquired and, subject to applicable law, to increase the Fund's
gross income.
The types of instruments to be purchased and sold by the Fund, the
nature of the
transactions which may be entered into and the risks associated
therewith are
described in the Statement of Additional Information, which
should be read in
conjunction with the following section.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call
and put
options and purchase call and put options on securities. The
Fund will write
options on securities for the purpose of increasing its
return on such
securities and/or to protect the value of its portfolio. In
particular, where
the Fund writes an option which expires unexercised or is closed
out by the Fund
at a profit, it will retain the premium paid for the option which
will increase
its gross income and will offset in part the reduced value of
the portfolio
security underlying the option, or the increased cost of portfolio
securities to
be acquired. In contrast, however, if the price of the underlying
security moves
adversely to the Fund's position, the option may be exercised and
the Fund will
be required to purchase or sell the underlying security at a
disadvantageous
price, which may only be partially offset by the amount of the
premium. The Fund
may also write combinations of put and call options on the same
security, known
as "straddles." Such transactions can generate additional
premium income but
also present increased risk.
By writing a call option on a security, the Fund limits its
opportunity to
profit from any increase in the market value of the underlying
security, since
the holder will usually exercise the call option when the
market value of the
underlying security exceeds the exercise price of the call.
However, the Fund
retains the risk of depreciation in value of securities on which
it has written
call options.
The Fund may also purchase put or call options in
anticipation of market
fluctuations which may adversely affect the value of its portfolio
or the prices
of securities that the Fund wants to purchase at a later date. In
the event that
the expected market fluctuations occur, the Fund may be able
to offset the
resulting adverse effect on its portfolio, in whole or in
part, through the
options purchased. The premium paid for a put or call
option plus any
transaction costs will reduce the benefit, if any, realized by
the Fund upon
exercise or liquidation of the option, and, unless the price of
the underlying
security changes sufficiently, the option may expire without value
to the Fund.
In certain instances, the Fund may enter into options on
Treasury securities
which may be referred to as "reset" options or "adjustable
strike" options.
These options provide for periodic adjustment of the strike
price and may also
provide for the periodic adjustment of the premium during
the term of the
option.
YIELD CURVE OPTIONS -- The Fund may also enter into options
on the yield
"spread", or yield differential, between two U.S. Government
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 or indices of securities, rather than
the price 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 or indices. 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 when
the yield of one
of the underlying securities or indices remains constant, if
the yield 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 written by
the Fund is covered if the Fund holds another call (or put)
option on the yield
spread between the same two securities or indices and maintains
in a segregated
account with its custodian cash or cash equivalents sufficient
to cover the
Fund's net liability under the two options. Therefore, the
Fund's maximum
liability for such a covered option is the difference between the
amount of the
Fund's liability under the option written by the Fund less
the value of the
option held by the Fund. Yield curve options may also be covered
in such other
manner as may be in accordance with the requirements of the
counter party with
which the option is traded and applicable laws and regulations.
Yield curve
options are traded over-the- counter and because they have been
only recently
introduced, established trading markets for these securities
have not yet
developed.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- The Fund may enter into interest rate and
foreign currency
futures contracts. The Fund may also enter into futures
contracts based on
financial indices, including any index of U.S. or Foreign
Government Securities.
(Unless otherwise specified, futures contracts on interest
rates, financial
indices, and foreign currency futures contracts are collectively
referred to as
"Futures Contracts.") The Fund will utilize Futures Contracts
for hedging and
non-hedging purposes, subject to applicable law. The Fund will
incur brokerage
fees when it purchases and sells Futures Contracts, and it will
be required to
make and maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS -- The Fund may purchase and
write options on
interest rate and foreign currency futures contracts. The Fund
may also enter
into options on futures contracts based on financial indices,
including any
index of U.S. or Foreign Government Securities. (Unless
otherwise specified,
options on financial indices futures contracts, interest rate
futures contracts
and options on foreign currency futures contracts are
collectively referred to
as "Options on Futures Contracts.") Such investment strategies
will be used for
hedging and non-hedging purposes, subject to applicable law.
Put and call
Options on Futures Contracts may be traded by the Fund in
order to protect
against declines in the values of portfolio securities or against
increases in
the cost of securities to be acquired. Purchases of Options on
Futures Contracts
may present less risk in hedging the portfolios of the Fund than
the purchase or
sale of the underlying Futures Contracts since the potential loss
is limited to
the amount of the premium plus related transaction costs. The
writing of such
options, however, does not present less risk than the
trading of Futures
Contracts and will constitute only a partial hedge, up to the
amount of the
premium received. In addition, if an option is exercised, the
Fund may suffer a
loss on the transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY -- The Fund may enter into
contracts for
the purchase or sale of a specific currency at a future date at
a price set at
the time of the contract (a "Forward Contract"). The Fund
will enter into
Forward Contracts for hedging and non-hedging purposes, including
transactions
entered into for the purpose of profiting from anticipated
changes in foreign
currency exchange rates. Transactions in Forward Contracts
entered into for
hedging purposes may include forward purchases or sales of
foreign currencies
for the purpose of protecting the dollar value of securities
denominated in a
foreign currency or protecting the dollar equivalent of interest
or dividends to
be paid on such securities. The Fund may also enter into Forward
Contracts for
"cross hedging" purposes, e.g., the purchase or sale of a
Forward Contract on
one type of currency as a hedge against adverse fluctuations in
the value of a
second type of currency. By entering into such transactions,
however, the Fund
may be required to forgo the benefits of advantageous changes in
exchange rates.
The Fund may also enter into transactions in Forward Contracts
for other than
hedging purposes. For example, if the Adviser believes that
the value of a
particular foreign currency will increase or decrease relative
to the value of
the U.S. dollar, the Fund may purchase or sell such currency,
respectively,
through a Forward Contract. If the expected changes in the value
of the currency
occur, the Fund will realize profits which will increase its gross
income. Such
transactions, however, may be considered speculative and
could involve
significant risk of loss, as set forth below. The Fund
has established
procedures consistent with statements of the SEC and its staff
regarding the use
of Forward Contracts by registered investment companies, which
requires use of
segregated assets or "cover" in connection with the purchase
and sale of such
Contracts.
Forward Contracts are traded over-the-counter, and not on
organized commodities
or securities exchanges. As a result, such contracts
operate in a manner
distinct from exchange-traded instruments, and their use involves
certain risks
beyond those associated with transactions in the Futures and
Options contracts
described above.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and
write put and call
options on foreign currencies for the purpose of protecting
against declines in
the dollar value of portfolio securities, and against increases
in the dollar
cost of securities to be acquired. As in the case of other
types of options,
however, the writing of an option on foreign currency will
constitute only a
partial hedge, up to the amount of the premium received, and the
Fund could be
required to purchase or sell foreign currencies at
disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on
foreign currency
may constitute an effective hedge against fluctuations in
exchange rates
although, in the event of rate movements adverse to the Fund's
position, it may
forfeit the entire amount of the premium plus related transaction
costs. As in
the case of Forward Contracts, certain options on foreign
currencies are traded
over-the-counter and involve risks which may not be present
in the case of
exchange-traded instruments.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND
FORWARD CONTRACTS:
Although the Fund will enter into certain transactions in
Futures Contracts,
Options on Futures Contracts, Forward Contracts and options
for hedging
purposes, such transactions do involve certain risks. For
example, a lack of
correlation between the index or instrument underlying an
option, Futures
Contract or Forward Contract and the assets being hedged, or
unexpected adverse
price movements, could render the Fund's hedging strategy
unsuccessful and could
result in losses. "Cross hedging" transactions may involve
greater correlation
risks. In addition, there can be no assurance that a liquid
secondary market
will exist for any contract purchased or sold, and the Fund may
be required to
maintain a position until exercise or expiration, which could
result in losses.
As noted, the Fund may also enter into transactions in such
instruments (except
for options on foreign currencies) for other than hedging
purposes (subject to
applicable law), including speculative transactions, which involve
greater risk.
In entering into such transactions, the Fund may experience losses
which are not
offset by gains on other portfolio positions, thereby reducing its
gross income.
In addition, the markets for such instruments may be extremely
volatile from
time to time, as discussed in the Statement of Additional
Information, which
could increase the risks incurred by the Fund in
entering into such
transactions.
Transactions in options may be entered into on U.S. exchanges
regulated by the
SEC, in the over-the-counter market and on foreign exchanges,
while Forward
Contracts may be entered into only in the over-the-counter
market. Futures
Contracts and Options on Futures Contracts may be entered into on
U.S. exchanges
regulated by the Commodity Futures Trading Commission (the
"CFTC") and on
foreign exchanges. The securities underlying options and
Futures Contracts
traded by the Fund may include domestic as well as foreign
securities. Investors
should recognize that transactions involving foreign
securities or foreign
currencies, and transactions entered into in foreign
countries, may involve
considerations and risks not typically associated with
investing in U.S.
markets.
Transactions in options, Futures Contracts, Options on Futures
Contracts and
Forward Contracts entered into for non-hedging purposes involve
greater risk and
could result in losses which are not offset by gains on other
portfolio assets.
For example, the Fund may sell Futures Contracts on an index of
securities in
order to profit from any anticipated decline in the value of
the securities
comprising the underlying index. In such instances, any losses
on the Futures
transaction will not be offset by gains on any portfolio
securities comprising
such index, as might occur in connection with a hedging
transaction. The risks
related to transactions in options, Futures Contracts,
Options on Futures
Contracts and Forward Contracts entered into by the Fund are
set forth in
greater detail in the Statement of Additional Information,
which should be
reviewed in conjunction with the foregoing discussion.
AGENCY AND U.S. GOVERNMENT-RELATED SECURITIES: Agency
Securities include
obligations issued or guaranteed by U.S. Government agencies,
authorities or
instrumentalities, some of which are supported by the right of
the issuer to
borrow from the U.S. Government, e.g., obligations of Federal
Home Loan Banks;
some of which are backed only by the credit of the issuer
itself, e.g.,
obligations of the Student Loan Marketing Association; and
some of which are
supported by the discretionary authority of the U.S. Government
to purchase the
agency's obligations, e.g., obligations of the Federal
National Mortgage
Association. No assurance can be given that the U.S. Government
will provide
financial support to these entities because it is not
obligated by law, in
certain instances, to do so. The primary types of Agency
Securities in which the
Fund invests are listed in Appendix A.
U.S. Government-related Securities and Agency-related Securities
(collectively,
"Government-related Securities") include, but are not limited to,
CMOs, SMBS and
government backed trust certificates ("GBTs") (see "Investment
Techniques --
Collateralized Mortgage Obligations and Multi-Class Pass-Through
Securities" and
"-- Stripped Mortgage-Backed Securities"). GBTs and certain CMOs,
SMBS and other
U.S. Government-related Securities are issued by private
entities, and are not
directly guaranteed by the U.S. Government or any U.S.
Government agency. They
are secured by the underlying collateral (U.S. Government
Securities or Agency
Securities, in the case of the Fund) held by the private issuer.
Furthermore, no
assurance can be given that the U.S. Government will provide
financial support
to CMOs and SMBS issued by U.S. Government agencies because it is
not obligated
by law, in certain instances, to do so.
PORTFOLIO TRADING: The Fund intends to manage its portfolio
by buying and
selling securities to help attain its investment objective. This
may result in
increases or decreases in the Fund's current income available for
distribution
to the Fund's shareholders and in the holding by the Fund of
debt securities
which sell at moderate to substantial premiums or discounts from
face value. The
Fund will engage in portfolio trading if it believes a
transaction, net of costs
(including custodian charges), will help in attaining its
investment objective.
(See "Portfolio Transactions and Brokerage Commissions" in
the Statement of
Additional Information.)
The primary consideration in placing portfolio security
transactions with
broker-dealers for execution is to obtain, and maintain the
availability of,
execution at the most favorable prices and in the most
effective manner
possible. Consistent with the foregoing primary consideration, the
Rules of Fair
Practice of the National Association of Securities Dealers,
Inc. (the "NASD")
and such other policies as the Trustees of the Fund may
determine, the Adviser
may consider sales of shares of the Fund and of other investment
company clients
of MFD, as a factor in the selection of broker-dealers to
execute the Fund's
portfolio transactions. From time to time, the Adviser may
direct certain
portfolio transactions to broker-dealer firms which, in turn, have
agreed to pay
a portion of the Fund's operating expenses (e.g., fees charged by
the custodian
of the Fund's assets). For a further discussion of portfolio
trading, see the
Statement of Additional Information.
-----------------
The policies described above are not fundamental and may be
changed without
shareholder approval, as may the Fund's investment objective. A
change in the
Fund's investment objective may result in the Fund having
an investment
objective different from the objective which the
shareholder considered
appropriate at the time of investment in the Fund.
The Statement of Additional Information includes a
discussion of other
investment policies and a listing of specific investment
restrictions which
govern the Fund's investment policies. The specific investment
restrictions
listed in the Statement of Additional Information may not be
changed without
shareholder approval (see "Investment Restrictions" in the
Statement of
Additional Information). The Fund's investment limitations,
policies and rating
standards are adhered to at the time of purchase or utilization
of assets; a
subsequent change in circumstances will not be considered to
result in a
violation of policy.
6. MANAGEMENT OF THE FUND
Investment Adviser -- MFS manages the Fund pursuant to an
Investment Advisory
Agreement dated September 1, 1993 (the "Advisory Agreement").
The Adviser
provides the Fund with overall investment advisory and
administrative services,
as well as general office facilities. Richard O. Hawkins, a
Senior Vice
President of the Adviser, and Stephen E. Nothern, a Senior Vice
President of the
Adviser, have been the Fund's portfolio managers since 1992.
Mr. Hawkins has
been employed by the Adviser since 1988. Mr. Nothern has been
employed by the
Adviser since 1986. Subject to such policies as the Trustees may
determine, the
Adviser makes investment decisions for the Fund. For its
services and
facilities, the Adviser receives a management fee, computed and
paid monthly, in
an amount equal to 0.32% of the Fund's average daily net assets
plus 5.65% of
its daily gross income for its then-current fiscal year.
For the Fund's fiscal year ended November 30, 1994, the
Fund's investment
adviser, MFS, received management fees under the Fund's Advisory
Agreement of
$2,849,997.
MFS also serves as investment adviser to each of the other
funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal
Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special
Value Trust, MFS
Institutional Trust, MFS Variable Insurance Trust, MFS Union
Standard Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund,
Inc. and seven
variable accounts, each of which is a registered investment
company established
by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination
fixed/variable
annuity contracts. MFS and its wholly owned subsidiary, MFS
Asset Management,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and
its predecessor
organizations have a history of money management dating from
1924 and the
founding of the first mutual fund in the United States,
Massachusetts Investors
Trust. Net assets under the management of the MFS
organization were
approximately 34.5 billion on behalf of approximately 1.6
million investor
accounts as of February 28, 1995. As of such date, the MFS
organization managed
approximately 11.5 billion of assets invested in equity
securities and
approximately 19.5 billion of assets invested in fixed
income securities.
Approximately $3.1 billion of the assets managed by MFS are
invested in
securities of foreign issuers and non-U.S. dollar denominated
securities of U.S.
issuers. MFS is a wholly owned subsidiary of Sun Life of Canada
(U.S.), which in
turn is a wholly owned subsidiary of Sun Life Assurance Company
of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L.
Shames, Arnold D.
Scott, John D. McNeil and John R. Gardner. Mr. Brodkin is the
Chairman, Mr.
Shames is the President and Mr. Scott is the Secretary and a
Senior Executive
Vice President of MFS. Messrs. McNeil and Gardner are the
Chairman and
President, respectively, of Sun Life. Sun Life, a mutual life
insurance company,
is one of the largest international life insurance companies
and has been
operating in the United States since 1895, establishing a
headquarters office
here in 1973. The executive officers of MFS report to the Chairman
of Sun Life.
A. Keith Brodkin, the Chairman of MFS, is the Chairman and
President of the
Trust. W. Thomas London, Stephen E. Cavan, James R. Bordewick,
Jr., Leslie J.
anberg and James O. Yost, all of whom are officers of MFS, are
officers of the
Trust.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the
distributor of
shares of the Fund and also serves as distributor for each of
the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the
"Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs
transfer agency,
certain dividend disbursing agency and other services for the
Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering
price through any
securities dealer, certain banks and other financial institutions
having selling
agreements with MFD. Non-securities dealer financial
institutions will receive
transaction fees that are the same as commission fees to
dealers. Securities
dealers and other financial institutions may also charge their
customers service
fees relating to investments in the Fund.
The Fund offers two classes of shares which bear sales charges and
distribution
fees in different forms and amounts:
CLASS A SHARES: Class A shares are offered at net asset value
plus an initial
sales charge (or CDSC in the case of certain purchases of $1
million or more) as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
- ----------------------------------------------------------------
SALES CHARGE AS<F1>
PERCENTAGE OF:
--------
- ------------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE
OFFERING PRICE INVESTED OF OFFERING PRICE
<S>
<C> <C> <C>
Less than $100,000 ....................................
4.75% 4.99% 4.00%
$100,000 but less than $250,000 .......................
4.00 4.17 3.20
$250,000 but less than $500,000 .......................
2.95 3.04 2.25
$500,000 but less than $1,000,000 .....................
2.20 2.25 1.70
$1,000,000 or more ....................................
None<F2> None<F2> See Below<F2>
- ------------------------
<FN>
<F1>Because of rounding in the calculation of offering price,
actual sales charges may be more or less than those calculated
using the percentages above.
<F2>A CDSC may apply in certain circumstances. MFD will pay a
commission on purchases of $1 million or more.
</TABLE>
No sales charge is payable at the time of purchase of
Class A shares on
investments of $1 million or more. However, a CDSC may be
imposed on such
investments in the event of a share redemption within 12 months
following the
share purchase, at the rate of 1% on the lesser of the value
of the shares
redeemed (exclusive of reinvested dividends and capital gain
distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable,
and, if so, the
amount of the charge, it is assumed that shares not subject to
the CDSC are the
first redeemed followed by other shares held for the longest
period of time. All
investments made during a calendar month, regardless of when
during the month
the investment occurred, will age one month on the last day of
the month and
each subsequent month. Except as noted below, the CDSC on Class A
shares will be
waived in the case of: (i) exchanges (except that if the shares
acquired by
exchange were then redeemed within 12 months of the initial
purchase (other than
in connection with subsequent exchanges to other MFS Funds),
the charge would
not be waived); (ii) distributions to participants from a
retirement plan
qualified under section 401(a) of the Code (a "Retirement Plan"),
due to: (a) a
loan from the plan (repayments of loans, however, will constitute
new sales for
purposes of assessing the CDSC); (b) "financial hardship" of the
participant in
the plan, as that term is defined in Treasury
Regulation Section
1.401(k)-1(d)(2), as amended from time to time; or (c)
the death of a
participant in such a plan; (iii) distributions from a
403(b) plan or an
Individual Retirement Account ("IRA"), due to death, disability,
or attainment
of age 59 1/2; (iv) tax-free returns of excess contributions
to an IRA; (v)
distributions by other employee benefit plans to pay benefits;
and (vi) certain
involuntary redemptions and redemptions in connection with
certain automatic
withdrawals from a qualified Retirement Plan. The CDSC on Class
A shares will
not be waived, however, if the Retirement Plan withdraws from the
Fund except if
that Retirement Plan has invested its assets in Class A shares of
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 Retirement Plan first invests its
assets in Class A
shares of one or more of the MFS Funds, the CDSC on Class A
shares will be
waived in the case of a redemption of all of the Retirement
Plan's shares
(including shares of any other class) in all MFS Funds (i.e., all
the assets of
the Retirement Plan invested in the MFS Funds are
withdrawn), unless,
immediately prior to the redemption, the aggregate amount
invested by the
Retirement Plan in Class A shares of the MFS Funds (excluding the
reinvestment
of distributions) during the prior four year period equals 50%
or more of the
total value of the Retirement Plan's assets in the MFS Funds, in
which case the
CDSC will not be waived. The CDSC on Class A shares will be
waived upon
redemption by a Retirement Plan where the redemption proceeds
are used to pay
expenses of the Retirement Plan or certain expenses of
participants under the
Retirement Plan (e.g., participant account fees), provided that
the Retirement
Plan's sponsor subscribes to the MFS Fundamental 401(k)
Plan\s/\m/ or another
similar recordkeeping system made available by the Shareholder
Servicing Agent.
The CDSC on Class A shares will be waived upon the transfer of
registration from
shares held by a Retirement Plan through a single account
maintained by the
Shareholder Servicing Agent to multiple Class A share accounts
maintained by the
Shareholder Servicing Agent on behalf of individual
participants in the
Retirement Plan, provided that the Retirement Plan's sponsor
subscribes to the
MFS Fundamental 401(k) Plan\s/\m/ or another similar
recordkeeping system made
available by the Shareholder Servicing Agent. Any applicable
CDSC will be
deferred upon an exchange of Class A shares of the Fund
for units of
participation of the MFS Fixed Fund (a bank collective
investment fund) (the
"Units"), and the CDSC will be deducted from the redemption
proceeds when such
Units are subsequently redeemed (assuming the CDSC is then
payable). No CDSC
will be assessed upon an exchange of Units for Class A shares of
the Fund. For
purposes of calculating the CDSC payable upon redemption of
Class A shares of
the Fund or Units acquired pursuant to one or more exchanges, the
period during
which the Units are held will be aggregated with the period
during which the
Class A shares are held. MFD shall receive all CDSCs which it
intends to apply
for the benefit of the Fund.
MFD allows discounts to dealers (which are alike for all
dealers) from the
applicable public offering price, as shown in the above table.
In the case of
the maximum sales charge, the dealer retains 4% and MFD retains
approximately
3/4 of 1% of the public offering price. The sales charge may
vary depending on
the number of shares of the Fund as well as certain MFS Funds
and other funds
owned or being purchased, the existence of an agreement to
purchase additional
shares during a 13-month period (or 36-month period for purchases
of $1 million
or more) or other special purchase programs. A description
of the Right of
Accumulation, Letter of Intent and Group Purchases privileges by
which the sales
charge may be reduced is set forth in the Statement of Additional
Information.
In addition, MFD will pay a commission to dealers who
initiate and are
responsible for purchases of $1 million or more as follows: 1.00%
on sales up to
$5 million, plus 0.25% on the amount in excess of $5 million.
Purchases of $1
million or more for each shareholder account will be aggregated
over a 12-month
period (commencing from the date of the first such purchase)
for purposes of
determining the level of commissions to be paid during that
period with respect
to such account.
Class A shares of the Fund may be sold at their net asset value to
the officers
of the Trust, to any of the subsidiary companies of Sun Life,
to eligible
Directors, officers, employees (including retired employees) and
agents of MFS,
Sun Life or any of their subsidiary companies, to any
trust, pension,
profit-sharing or any other benefit plan for such persons, to
any trustees and
retired trustees of any investment company for which MFD serves
as distributor
or principal underwriter, and to certain family members of such
individuals and
their spouses, provided the shares will not be resold except to
the Fund. Class
A shares of the Fund may be sold at net asset value to any
employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to
certain family
members of such individuals and their spouses, or to any
trust, pension,
profit-sharing or other retirement plan for the sole benefit of
such employee or
representative, provided such shares will not be resold
except to the Fund.
Class A shares of the Fund may also be sold at their net asset
value to any
employee or registered representative of any dealer or
other financial
institution which has a sales agreement with MFD or its
affiliates, to certain
family members of such employees or representatives and their
spouses, or to any
trust, pension, profit-sharing or other retirement plan for the
sole benefit of
such employee or representative, as well as to clients of
the MFS Asset
Management, Inc. Class A shares may be sold at net asset
value, subject to
appropriate documentation through a dealer where the amount
invested represents
redemption proceeds from a registered open-end management
investment company not
distributed or managed by MFD or its affiliates if: (i) the
redeemed shares were
subject to an initial sales charge or a deferred sales charge
(whether or not
actually imposed); (ii) such redemption has occurred no more than
90 days prior
to the purchase of Class A shares of the Fund; and (iii) the
Fund, MFD or its
affiliates have not agreed with such company or its
affiliates, formally or
informally, to sell Class A shares at net assets value or
provide any other
incentive with respect to such redemption and sale. Class A
shares of the Fund
may also be sold at net asset value where the amount
invested represents
redemption proceeds from the MFS Fixed Fund. In addition, Class A
shares may be
sold at their net asset value in connection with the acquisition
or liquidation
of the assets of other investment companies or personal
holding companies.
Insurance company separate accounts may purchase Class A shares
of the Fund at
their net asset value. Class A shares of the Fund may be
purchased at net asset
value by retirement plans whose third party administrators have
entered into an
administrative services agreement with MFD or one or more of its
affiliates to
perform certain administrative services, subject to
certain operational
requirements specified from time to time by MFD or one or
more of its
affiliates. Class A shares of the Fund may be purchased at net
asset value
through certain broker- dealers and other financial
institutions which have
entered into an agreement with MFD which includes a requirement
that such shares
be sold for the benefit of clients participating in a "wrap
account" or a
similar program under which such clients pay a fee to such
broker-dealer or
other financial institution.
Class A shares of the Fund may be purchased at net asset
value by certain
retirement plans subject to the Employee Retirement Income
Security Act of 1974,
as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the
satisfaction of MFD
that either (a) the employer has at least 25 employees or (b)
the aggregate
purchases by the retirement plan of Class A shares of the MFS
Funds will be
in an amount of at least $250,000 within a reasonable
period of time, as
determined by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the
event of certain
redemption transactions within 12 months following such
purchases.
Dealers who initiate and are responsible for purchases of Class A
shares of the
Fund in this manner will be paid a commission by MFD, as follows:
1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5
million; provided,
however, that MFD may pay a commission, on sales in excess of
$5 million to
certain retirement plans, of 1.00% to certain dealers
which, at MFD's
invitation, enter into an agreement with MFD in which the
dealer agrees to
return any commission paid to it on the sale (or on a pro rata
portion thereof)
if the shareholder redeems his or her shares within a period
of time after
purchase as specified by MFD. Purchases of $1 million or
more for each
shareholder account will be aggregated over a 12-month period
(commencing from
the date of the first such purchase) for purposes of determining
the level of
commissions to be paid during that period with respect to such
account.
Class A shares of the Fund may be purchased at net asset value
by retirement
plans qualified under section 401(k) of the Code through certain
broker- dealers
and other financial institutions which have entered into an
agreement with MFD
which includes certain minimum size qualifications for such
retirement plans and
provides that the broker-dealer or other financial institution
will perform
certain administrative services with respect to the plan's
account. Class A
shares of the Fund may be sold at net asset value through
the automatic
reinvestment of Class A and Class B distributions which
constitute withdrawals
from qualified retirement plans. Furthermore, Class A shares of
the Fund may be
sold at net asset value through the automatic reinvestment of
distributions of
dividends and capital gains of other MFS Funds pursuant to the
Distribution
Investment Program (see "Shareholder Services" in the Statement
of Additional
Information).
CLASS B SHARES: Class B shares are offered at net asset value
without an initial
sales charge but subject to a CDSC as follows:
YEAR OF
CONTINGENT
REDEMPTION
DEFERRED SALES
AFTER PURCHASE
CHARGE
-------------- --
- -------------
First ....................................................
4%
Second ...................................................
4%
Third ....................................................
3%
Fourth ...................................................
3%
Fifth ....................................................
2%
Sixth ....................................................
1%
Seventh and following ....................................
0%
For Class B shares purchased prior to January 1, 1993, the Fund
imposes a CDSC
as a percentage of redemption proceeds as follows:
YEAR OF
CONTINGENT
REDEMPTION
DEFERRED SALES
AFTER PURCHASE
CHARGE
-------------- --
- -------------
First ....................................................
6%
Second ...................................................
5%
Third ....................................................
4%
Fourth ...................................................
3%
Fifth ....................................................
2%
Sixth ....................................................
1%
Seventh and following ....................................
0%
CDSC upon redemption of shares acquired in an exchange, the
purchase of shares
acquired in one or more exchanges is deemed to have occurred at
the time of the
original purchase of the exchanged shares. See "Redemptions and
Repurchases --
Contingent Deferred Sales Charge" for further discussion of the
CDSC.
The CDSC on Class B shares will be waived upon the death or
disability (as
defined in section 72(m)(7) of the Code) of any investor,
provided the account
is registered (i) in the case of a deceased individual, solely
in the deceased
individual's name, (ii) in the case of a disabled individual,
solely or jointly
in the disabled individual's name or (iii) in the name of a living
trust for the
benefit of the deceased or disabled individual. The CDSC on Class
B shares will
also be waived in the case of redemptions of shares of the Fund
pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B
shares will be
waived in the case of distributions from an IRA, SAR-SEP or any
other retirement
plan qualified under sections 401(a) or 403(b) of the Code,
due to death or
disability, or in the case of required minimum distributions
from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class
B shares will
be waived in the case of distributions from a Retirement Plan due
to (i) returns
of excess contribution to the plan, (ii) retirement of a
participant in the
plan, (iii) a loan from the plan (repayments of loans, however,
will constitute
new sales for purposes of assessing the CDSC), (iv) "financial
hardship" of the
participant in the plan, as that term is defined in Treasury
Regulation Section
1.401(k)-1(d)(2), as amended from time to time, and (v)
termination of
employment of the participant in the plan (excluding, however,
a partial or
other termination of the plan). The CDSC on Class B shares will be
waived in the
case of distributions from a SAR-SEP due to (i) returns of excess
contribution
to the plan, (ii) retirement of a participant in the plan and
(iii) termination
of employment of the participant in the plan (excluding, however,
a partial or
other termination of the plan). The CDSC on Class B shares will
also be waived
upon redemption by (i) officers of the Fund, (ii) any of
the subsidiary
companies of Sun Life, (iii) eligible Directors, officers,
employees (including
retired and former employees) and agents of MFS, Sun Life
or any of their
subsidiary companies, (iv) any trust, pension, profit-sharing
or any other
benefit plan for such persons, (v) any trustees and retired
trustees of any
investment company for which MFD serves as distributor or
principal underwriter,
and (vi) certain family members of such individuals and their
spouses, provided
in each case that the shares will not be resold except to the
Fund. The CDSC on
Class B shares will also be waived in the case of redemptions by
any employee or
registered representative of any dealer or other financial
institution which has
a sales agreement with MFD, by certain family members of any
such employee or
representative and their spouses, by any trust, pension, profit-
sharing or other
retirement plan for the sole benefit of such employee or
representative and by
clients of the MFS Asset Management, Inc. A Retirement Plan
that has invested
its assets in Class B shares of 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 the
Retirement Plan first invests its assets in Class B shares of one
or more of the
MFS Funds will have the CDSC on Class B shares waived in
the case of a
redemption of all the Retirement Plan's shares (including
shares of any other
class) in all MFS Funds (i.e., all the assets of the Retirement
Plan invested in
the MFS Funds are withdrawn), except that if, immediately
prior to the
redemption, the aggregate amount invested by the Retirement
Plan in Class B
shares of the MFS Funds (excluding the reinvestment of
distributions) during the
prior four year period equals 50% or more of the total value of
the Retirement
Plan's assets in the MFS Funds, then the CDSC will not be
waived. The CDSC on
Class B shares will be waived upon redemption by a Retirement
Plan where the
redemption proceeds are used to pay expenses of the Retirement
Plan or certain
expenses of participants under the Retirement Plan (e.g.,
participant account
fees), provided that the Retirement Plan's sponsor
subscribes to the MFS
Fundamental 401(k) Plan\s/\m/ or another similar
recordkeeping system made
available by the Shareholder Servicing Agent. The CDSC on Class B
shares will be
waived upon the transfer of registration from shares held by a
Retirement Plan
through a single account maintained by the Shareholder
Servicing Agent to
multiple Class B share accounts provided that the Retirement
Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan\s/\m/ or
another similar
recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC
on Class B shares may also be waived in connection with the
acquisition or
liquidation of the assets of other investment companies or
personal holding
companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that
remain outstanding
for approximately eight years will convert to Class A shares of
the Fund. Shares
purchased through the reinvestment of distributions paid in
respect of Class B
shares will be treated as Class B shares for purposes of the
payment of the
distribution and service fees under the Distribution Plan
applicable to Class B
shares. However, for purposes of conversion to Class A shares,
all shares in a
shareholder's account that were purchased through the
reinvestment of dividends
and distributions paid in respect of Class B shares (and
which have not
converted to Class A shares as provided in the following
sentence) will be held
in a separate sub-account. Each time any Class B shares in the
shareholder's
account (other than those in the sub-account) convert to
Class A shares, a
portion of the Class B shares then in the sub-account will also
convert to Class
A shares. The portion will be determined by the ratio that the
shareholder's
Class B shares not acquired through reinvestment of dividends and
distributions
that are converting to Class A shares bear to the shareholder's
total Class B
shares not acquired through such reinvestment. The conversion of
Class B shares
to Class A shares is subject to the continuing availability of a
ruling from the
Internal Revenue Service or an opinion of counsel that such
conversion will not
constitute a taxable event for Federal tax purposes. There can
be no assurance
that such ruling or opinion will be available, and the
conversion of Class B
shares to Class A shares will not occur if such ruling or
opinion is not
available. In such event, Class B shares would continue to be
subject to higher
expenses than Class A shares for an indefinite period.
GENERAL: Except as described below, the minimum initial investment
is $1,000 per
account and the minimum additional investment is $50 per account.
Accounts being
established for monthly automatic investments and under payroll
savings programs
and tax-deferred retirement programs (other than IRAs) involving
the submission
of investments by means of group remittal statements are
subject to a $50
minimum on initial and additional investments per account. The
minimum initial
investment for IRAs is $250 per account and the minimum additional
investment is
$50 per account. Accounts being established for participation in
the Automatic
Exchange Plan are subject to a $50 minimum on initial and
additional investments
per account. There are also other limited exceptions to these
minimums for
certain tax-deferred retirement programs. Any minimums may be
changed at any
time at the discretion of MFD. The Fund reserves the right to
cease offering its
shares for sale at any time.
For shareholders who elect to participate in certain investment
programs (e.g.,
the Automatic Investment Plan) or other shareholder
services, MFD or its
affiliates may either (i) give a gift of nominal value, such
as a hand- held
calculator, or (ii) make a nominal charitable contribution on
their behalf.
A shareholder whose shares are held in the name of, or
controlled by, an
investment dealer, might not receive many of the privileges and
services from
the Fund (such as Right of Accumulation, Letter of Intent
and certain
recordkeeping services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes
only. The Fund
and MFD each reserve the right to reject any specific
purchase order or to
restrict purchases by a particular purchaser (or group
of related
purchasers).The Fund or MFD may reject or restrict any purchases
by a particular
purchaser or group, for example, when such purchase is
contrary to the best
interests of the Fund's other shareholders or otherwise
would disrupt the
management of the Fund.
MFD may enter into an agreement with shareholders who intend to
make exchanges
among certain classes of certain MFS Funds (as determined by MFD)
which follow a
timing pattern, and with individuals or entities acting on such
shareholders'
behalf (collectively, "market timers"), setting forth the terms,
procedures and
restrictions with respect to such exchanges. In the absence
of such an
agreement, it is the policy of the Fund and MFD to reject or
restrict purchases
by market timers if (i) more than two exchange purchases are
effected in a timed
account in the same calendar quarter or (ii) a purchase would
result in shares
being held in timed accounts by market timers representing
more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts
in the case of
certain MFS Funds which may include the Fund and which may
change from time to
time. The Fund and MFD each reserve the right to request market
timers to redeem
their shares at net asset value, less any applicable CDSC, if
either of these
restrictions is violated.
Securities dealers and other financial institutions may
receive different
compensation with respect to sales of Class A and Class B shares.
From time to
time, MFD may pay dealers 100% of the applicable sales charge on
sales of Class
A shares of certain specified MFS Funds sold by such dealer
during a specified
sales period. In addition, MFD or its affiliates may, from
time to time, pay
dealers an additional commission equal to 0.50% of the net asset
value of all of
the Class B shares of certain specified Funds sold by such
dealer during a
specified sales period. In addition, from time to time, MFD, at
its expense, may
provide additional commissions, compensation or
promotional incentives
("concessions") to dealers which sell shares of the Fund. The
staff of the SEC
has indicated that dealers who receive more than 90% of the sales
charge may be
considered underwriters. Such concessions provided by MFD may
include financial
assistance to dealers in connection with preapproved
conferences or seminars,
sales or training programs for invited registered
representatives, payment for
travel expenses, including lodging, incurred by registered
representatives and
members of their families or other invited guests to various
locations for such
seminars or training programs, seminars for the public,
advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-
sponsored events.
In some instances, these concessions may be offered to
dealers or only to
certain dealers who have sold or may sell, during specified
periods, certain
minimum amounts of shares of the Fund. From time to time, MFD
may make expense
reimbursements for special training of a dealer's registered
representatives in
group meetings or to help pay the expenses of sales contests.
Other concessions
may be offered to the extent not prohibited by the laws of
any state or any
self-regulatory agency, such as the NASD.
The Glass-Steagall Act prohibits national banks from engaging in
the business of
underwriting, selling or distributing securities. Although
the scope of the
prohibition has not been clearly defined, MFD believes that such
Act should not
preclude banks from entering into agency agreements with MFD
(as described
above). If, however, a bank were prohibited from so acting, the
Trustees would
consider what actions, if any, would be necessary to
continue to provide
efficient and effective shareholder services. It is not
expected that
shareholders would suffer any adverse financial consequence as a
result of these
occurrences. In addition, state securities laws on this issue
may differ from
the interpretation of federal law expressed herein, and banks
and financial
institutions may be required to register as broker-dealers
pursuant to state
law.
EXCHANGES
Subject to the restrictions set forth below, some or all of
the shares in an
account with the Fund for which payment has been received by the
Fund (i.e., an
established account) may be exchanged for shares of the same class
of any of the
other MFS Funds (if available for sale) at net asset value.
Shares of one class
may not be exchanged for shares of any other class. Exchanges
will be made only
after instructions in writing or by telephone (an "Exchange
Request") are
received for an established account by the Shareholder Servicing
Agent in proper
form (i.e., if in writing -- signed by the record owner(s) exactly
as the shares
are registered; if by telephone -- proper account identification
is given by the
dealer or shareholder of record); and each exchange must involve
either shares
having an aggregate value of at least $1,000 ($50 in the case of
retirement plan
participants whose sponsoring organizations subscribe to the
MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made
available by the
Shareholder Servicing Agent) or all the shares in the account.
If the Exchange
Request is received by the Shareholder Servicing Agent in
writing or by
telephone on any business day prior to the close of regular
trading on the
Exchange, the exchange usually will occur on that day if all the
requirements
set forth above have been complied with at that time. No
more than five
exchanges may be made in any one Exchange Request by
telephone. Additional
information concerning this exchange privilege and prospectuses
for any of the
other MFS Funds may be obtained from investment dealers or
the Shareholder
Servicing Agent. A shareholder should read the prospectus of the
other MFS Fund
and consider the differences in objectives and policies
before making any
exchange. For federal and (generally) state income tax purposes,
an exchange is
treated as a sale of the shares exchanged and, therefore, an
exchange could
result in a gain or loss to the shareholder making the exchange.
Exchanges by
telephone are automatically available to most non-retirement
plan accounts and
certain retirement plan accounts. For further information
regarding exchanges by
telephone see "Redemptions By Telephone." The exchange privilege
(or any aspect
of it) may be changed or discontinued and is subject to certain
limitations,
including certain restrictions on purchases by market
timers. Special
procedures, privileges and restrictions with respect to
exchanges may apply to
market timers who enter into an agreement with MFD, as set
forth in such
agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in
his account on
any date on which the Fund is open for business by redeeming
shares at their net
asset value or by selling such shares to the Fund through
a dealer (a
repurchase). Since the net asset value of shares of the
account fluctuates,
redemptions or repurchases, which are taxable transactions, are
likely to result
in gains or losses to the shareholder. When a shareholder
withdraws an amount
from his account, the shareholder is deemed to have tendered
for redemption a
sufficient number of full and fractional shares in his account
to cover the
amount withdrawn. The proceeds of a redemption or repurchase
will normally be
available within seven days, except for shares purchased, or
received in
exchange for shares purchased, by check (including certified
checks or cashier's
checks); payment of redemption proceeds may be delayed for up
to 15 days from
the purchase date in an effort to assure that such check has
cleared. Payment of
redemption proceeds may be delayed for up to seven days from the
redemption date
if the Fund determines that such a delay would be in the best
interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to
redeem all or any
portion of the shares in his account by mailing or delivering to
the Shareholder
Servicing Agent (see back cover for address) a stock power
with a written
request for redemption or a letter of instruction, together
with his share
certificates (if any were issued), all in "good order" for
transfer."Good order"
generally means that the stock power, written request for
redemption, letter of
instruction or share certificate must be endorsed by the record
owner(s) exactly
as the shares are registered and the signature(s) must be
guaranteed in the
manner set forth below under the caption "Signature Guarantee."
In addition, in
some cases "good order" may require the furnishing of additional
documents. The
Shareholder Servicing Agent may make certain de minimis
exceptions to the above
requirements for redemption. Within seven days after receipt
of a redemption
request in "good order" by the Shareholder Servicing Agent, the
Fund will make
payment in cash, of the net asset value of the shares next
determined after such
redemption request was received, reduced by the amount of any
applicable CDSC
described above and the amount of any income tax required to be
withheld, except
during any period in which the right of redemption is
suspended or date of
payment is postponed because the Exchange is closed or trading
on the Exchange
is restricted or to the extent otherwise permitted by the
1940 Act, if an
emergency exists (see "Tax Status").
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an
amount from his
account by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-
2606. Shareholders wishing to avail themselves of this
telephone redemption
privilege must so elect on their Account Application,
designate thereon a
commercial bank and account number to receive the proceeds of
such redemption,
and sign the Account Application Form with the signature(s)
guaranteed in the
manner set forth below under the caption "Signature Guarantee."
The proceeds of
such a redemption, reduced by the amount of any applicable CDSC
described above
and the amount of any income tax required to be withheld, are
mailed by check to
the designated account, without charge. As a special service,
investors may
arrange to have proceeds in excess of $1,000 wired in federal
funds to the
designated account. If a telephone redemption request is
received by the
Shareholder Servicing Agent by the close of regular trading on
the Exchange on
any business day, shares will be redeemed at the closing net
asset value of the
Fund on that day. Subject to the conditions described in this
section, proceeds
of a redemption are normally mailed or wired on the next business
day following
the date of receipt of the order for redemption. The Shareholder
Servicing Agent
will not be responsible for any losses resulting from
unauthorized telephone
transactions if it follows reasonable procedures designed to
verify the identity
of the caller. The Shareholder Servicing Agent will request
personal or other
information from the caller, and will normally also record calls.
Shareholders
should verify the accuracy of confirmation statements
immediately after their
receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell
his shares at
net asset value through his securities dealer (a repurchase),
the shareholder
can place a repurchase order with his dealer, who may charge the
shareholder a
fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR
TO THE CLOSE OF
REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD
BEFORE THE CLOSE OF
BUSINESS ON THE SAME DAY, THE SHAREHOLDER WILL RECEIVE THE
NET ASSET VALUE
CALCULATED ON THAT DAY.
D. REDEMPTION BY CHECK -- Class A shares may be redeemed by check.
A shareholder
owning Class A shares of the Fund may elect to have a special
account with State
Street Bank and Trust Company (the "Bank") for the purpose of
redeeming Class A
shares from his or her account by check. The Bank will provide
each Class A
shareholder, upon request, with forms of checks drawn on
the Bank. Only
shareholders having accounts in which no share certificates
have been issued
will be permitted to redeem shares by check. Checks may be made
payable in any
amount not less than $500. Shareholders wishing to avail
themselves of this
redemption by check privilege should so request on their Account
Application,
must execute signature cards (for additional information,
see the Account
Application) with signature guaranteed in the manner set forth
under the caption
"Signature Guarantee", and must return any Class A share
certificates issued to
them. Additional documentation will be required from corporations,
partnerships,
fiduciaries or other such institutional investors. All checks
must be signed by
the shareholder(s) of record exactly as the account is
registered before the
Bank will honor them. The shareholders of joint accounts may
authorize each
shareholder to redeem by check. The check may not draw on
monthly dividends
which have been declared but not distributed. SHAREHOLDERS WHO
PURCHASE CLASS A
SHARES BY CHECK (INCLUDING CERTIFIED CHECKS OR CASHIER'S
CHECKS) MAY WRITE
CHECKS AGAINST THOSE SHARES ONLY AFTER THEY HAVE BEEN ON THE
FUND'S BOOKS FOR 15
DAYS. WHEN SUCH A CHECK IS PRESENTED TO THE BANK FOR PAYMENT,
A SUFFICIENT
NUMBER OF FULL AND FRACTIONAL SHARES WILL BE REDEEMED TO COVER THE
AMOUNT OF THE
CHECK, ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE
WITHHELD. IF THE AMOUNT OF THE CHECK IS GREATER THAN THE VALUE
OF THE CLASS A
SHARES HELD IN THE SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE
RETURNED UNPAID, AND
THE SHAREHOLDER MAY BE SUBJECT TO EXTRA CHARGES. SHAREHOLDERS
ARE ADVISED
AGAINST REDEEMING ALL OR MOST OF THEIR ACCOUNT BY CHECK BECAUSE
WHEN THE CHECK
IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW THE EXACT TOTAL VALUE
OF THE ACCOUNT
ON THE DAY THE CHECK CLEARS. There is presently no charge to the
shareholder for
the maintenance of this special account or for the clearance of
any checks, but
the Fund reserves the right to impose such charges or to modify or
terminate the
redemption by check privilege at any time. If a shareholder's
Class A shares are
subject to a CDSC (due to a purchase of $1 million or more),
the shareholder
should ensure that there are sufficient funds in the account to
cover the check
and the CDSC.
GENERAL: Shareholders of the Fund who have redeemed their
shares have a one-
time right to reinvest the redemption proceeds in the same
class of shares of
any of the MFS Funds (if shares of such Fund are available
for sale) at net
asset value (with a credit for any CDSC paid) within 90 days of
the redemption
pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC
paid are then redeemed within six years of the initial purchase
in the case of
Class B shares or within 12 months of the initial purchase for
certain Class A
share purchases, a CDSC will be imposed upon redemption. Such
purchases under
the Reinstatement Privilege are subject to all limitations in
the Statement of
Additional Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations,
the Fund has
reserved the right to pay the redemption or repurchase price of
shares of the
Fund, either totally or partially, by a distribution in kind
of portfolio
securities (instead of cash). The securities so distributed
would be valued at
the same amount as that assigned to them in calculating the net
asset value for
the shares being sold. If a shareholder received a distribution
in kind, the
shareholder could incur brokerage or transaction charges in
converting the
securities to cash.
Due to the relatively high cost of maintaining small accounts, the
Fund reserves
the right to redeem shares in any account for their then-current
value (which
will be promptly paid to the shareholder) if at any time the total
investment in
such account drops below $500 because of redemptions, except
in the case of
accounts established for monthly automatic investments and
certain payroll
savings programs, Automatic Exchange Plan accounts and tax-
deferred retirement
plans, for which there is a lower minimum investment
requirement. See
"Purchases". Shareholders will be notified that the value of
their account is
less than the minimum investment requirement and allowed 60
days to make an
additional investment before the redemption is processed.
No CDSC will be
imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders to the
greatest extent
possible against fraud, the Fund requires in certain
instances as indicated
above that the shareholder's signature be guaranteed. In
these cases the
shareholder's signature must be guaranteed by an eligible bank,
broker, dealer,
credit union, national securities exchange, registered securities
association,
clearing agency or savings association. Signature guarantees
shall be accepted
in accordance with policies established by the Shareholder
Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE -- Investments ("Direct
Purchases") will be
subject to a CDSC for a period of 12 months (in the case of
purchases of $1
million or more of Class A shares) or six years (in the case of
purchases of
Class B shares). Purchases of Class A shares made during a
calendar month,
regardless of when during the month the investment occurred, will
age one month
on the last day of the month and each subsequent month. Class B
shares purchased
on or after January 1, 1993 will be aggregated on a calendar
month basis -- all
transactions made during a calendar month, regardless of when
during the month
they have occurred, will age one year at the close of business
on the last day
of such month in the following calendar year and each subsequent
year. For Class
B shares of the Fund purchased prior to January 1, 1993,
transactions will be
aggregated on a calendar year basis -- all transactions made
during a calendar
year, regardless of when during the year they have occurred,
will age one year
at the close of business on December 31 of that year and each
subsequent year.
At the time of a redemption, the amount by which the value of a
shareholder's
account for a particular class represented by Direct Purchases
exceeds the sum
of the six calendar year aggregations (12 months in the case of
purchases of $1
million or more of Class A shares) of Direct Purchases may be
redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on
additional shares
acquired through the automatic reinvestment of dividends or
capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular
class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of
redemption equal
to the then-current value of Reinvested Shares is not subject to
the CDSC, but
(iii) any amount of the redemption in excess of the
aggregate of the
then-current value of Reinvested Shares and the Free Amount
is subject to a
CDSC. The CDSC will first be applied against the amount of
Direct Purchases
which will result in any such charge being imposed at the lowest
possible rate.
The CDSC to be imposed upon redemptions will be calculated
as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges
or transfers of
registration, except that, with respect to transfers of
registration to an IRA
rollover account, the CDSC will be waived if the shares being
reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class
A and Class B
shares 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
plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan
provides that the
Fund will pay MFD a distribution/service fee aggregating up
to (but not
necessarily all of) 0.35% of the average daily net assets
attributable to Class
A shares annually in order that MFD may pay expenses on
behalf of the Fund
related to the distribution and servicing of Class A shares. The
expenses to be
paid by MFD on behalf of the Fund include a service fee to
securities dealers
which enter into a sales agreement with MFD of up to 0.25%
per annum of the
Fund's average daily net assets attributable to Class A shares
that are owned by
investors for whom such securities dealer is the holder or
dealer of record.
This fee is intended to be partial consideration for all
personal services
and/or account maintenance services rendered by the dealer with
respect to Class
A shares. MFD may from time to time reduce the amount of the
service fee paid
for shares sold prior to a certain date. MFD will also retain a
distribution fee
of 0.10% per annum of the Fund's average daily net assets
attributable to Class
A shares as partial consideration for services performed and
expenses incurred
in the performance of MFD's obligations under its distribution
agreement with
the Fund. In addition, to the extent that the aggregate of the
foregoing fees
does not exceed 0.35% per annum of the average daily net
assets of the Fund
attributable to Class A shares, the Fund is permitted
to pay other
distribution-related expenses, including commissions to dealers
and payments to
wholesalers employed by MFD for sales at or above a certain
dollar level.
Payments under the Class A Distribution Plan will commence on the
date on which
the value of the Fund's net assets attributable to Class A
shares first equals
or exceeds $40,000,000, at which time MFD intends to waive the
0.10% per annum
distribution fee to which it is entitled under the plan until
such time as the
payment of this fee is approved by the Trust's Board of Trustees.
Fees payable
under the Class A Distribution Plan are charged to, and therefore
reduce, income
allocated to Class A shares. Service fees may be reduced for a
securities dealer
that is the holder or dealer of record for an investor who owns
shares of the
Fund having a 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 Class A Rule 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.
Certain banks and
other financial institutions that have agency agreements with
MFD will receive
service fees that are the same as service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan
provides that the
Fund will pay MFD a daily distribution fee equal on an annual
basis to 0.75% of
the Fund's average daily net assets attributable to Class B
shares and will pay
MFD a service fee of up to 0.25% per annum of the Fund's
average daily net
assets attributable to Class B shares (which MFD will in turn pay
to securities
dealers which enter into a sales agreement with MFD at a rate of
up to 0.25% per
annum of the Fund's average daily net assets attributable to
Class B shares
owned by investors for whom that securities dealer is the
holder or dealer of
record). This service fee is intended to be additional
consideration for all
personal services and/or account maintenance services rendered
by the dealer
with respect to Class B shares. Fees payable under the Class B
Distribution Plan
are charged to, and therefore reduce, income allocated to Class
B shares. The
Class B Distribution Plan also provides that MFD will
receive all CDSCs
attributable to Class B shares (see "Redemptions and
Repurchases of Shares"
above), which do not reduce the distribution fee. MFD will pay
commissions to
dealers of 3.75% of the purchase price of shares purchased through
dealers. MFD
will also advance to dealers the first year service fee 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. Therefore, the total amount paid to a
dealer upon the
sale of shares is 4.00% of the purchase price of the shares
(commission rate of
3.75% plus service fee equal to 0.25% of the purchase price).
Dealers will
become eligible for additional service fees with respect
to such shares
commencing in the thirteenth month following the purchase. 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
Class B 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. The purpose of the distribution
payments to MFD under
the Class B Distribution Plan is to compensate MFD for its
distribution services
to the Fund. Since MFD's compensation is not directly tied to its
expenses, the
amount of compensation received by MFD during any year may be
more or less than
its actual expenses. For this reason, this type of distribution
fee arrangement
is characterized by the staff of the SEC as being of the
"compensation"
variety.However, the Fund is not liable for any expenses
incurred by MFD in
excess of the amount of compensation it receives. The expenses
incurred by MFD,
including commissions to dealers, are likely to be greater than
the distribution
fees for the next several years, but thereafter such expenses
may be less than
the amount of the distribution fees. Certain banks and
other financial
institutions that have agency agreements with MFD will
receive agency
transaction and service fees that are the same as commissions
and service fees
to dealers.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net
investment income to
its shareholders as dividends on a monthly basis. In
determining the net
investment income available for distributions, the Fund may rely
on projections
of its anticipated net investment income, including short-term
capital gains
from the sales of securities or other assets and premiums from
options written,
over a longer term, rather than its actual net investment income
for the period.
If the Fund earns less than projected, or otherwise distributes
more than its
earnings for the year, a portion of the distribution may
constitute a return of
capital. Distributions from short-term capital gains, if any,
from the sale of
securities or other assets, and of all or a portion of premiums
received from
options (including premiums received on options written and
expected to be
earned over the near term), are expected to be made monthly. In
addition, the
Fund will make one or more distributions during the
calendar year to its
shareholders from any long-term capital gains. Shareholders may
elect to receive
dividends and capital gain distributions in either cash or
additional shares of
the same class with respect to which a distribution is made.
See "Tax Status"
and "Shareholder Services -- Distribution Options" below.
Distributions paid by
the Fund with respect to Class A shares will generally be
greater than those
paid with respect to Class B shares because expenses
attributable to Class B
shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of
the Trust for
federal income tax purposes. In order to minimize the taxes
the Fund would
otherwise be required to pay, the Fund intends to qualify
each year as a
"regulated investment company" under Subchapter M of the
Code, and to make
distributions to its shareholders in accordance with the timing
requirements
imposed by the Code. It is expected that the Fund will not be
required to pay
entity level federal income or excise taxes, although foreign-
source income
earned by the Fund may be subject to foreign withholding taxes.
Shareholders of
the Fund normally will have to pay federal income taxes, (and
any state and
local taxes), on the dividends and capital gain distributions
they receive from
the Fund, whether paid in cash or additional shares.
Dividends of the Fund that are derived from interest on
obligations of the U.S.
Government and certain of its agencies and instrumentalities (but
generally not
from capital gains realized upon a disposition of such
obligations) may be
exempt from state and local taxes in certain states. Shareholders
should consult
their tax advisers regarding the possible exclusion of such
portion of their
dividends for state and local income tax purposes. Residents of
certain states
may be subject to an intangible tax or a personal property
tax on all or a
portion of the value of their shares.
A statement setting forth the federal income tax status of all
dividends and
distributions for each calendar year, including the portion
taxable as ordinary
income, the portion taxable as long-term capital gain, the portion
representing
interest on U.S. Government obligations, the portion, if any,
representing a
return of capital (which is free of current taxes but
results in a basis
reduction), and the amount, if any, of federal income tax
withheld will be sent
to each shareholder promptly after the end of such calendar year.
Fund distributions will reduce the Fund's net asset
value per share.
Shareholders who buy shares shortly before the Fund makes a
distribution may
thus pay the full price for the shares and then effectively
receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at a
rate of 30% on
dividends and certain other payments that are subject to such
withholding and
that are made to persons who are neither citizens nor residents
of the U.S.,
regardless of whether a lower rate may be permitted under an
applicable law or
treaty. The Fund is also required in certain circumstances to
apply backup
withholding of 31% on taxable dividends and redemption
proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor
a resident of
the U.S.) who does not furnish to the Fund certain
information and
certifications or who is otherwise subject to backup
withholding. However,
backup withholding will not be applied to payments which
have had 30%
withholding taken. Prospective investors should read the Account
Application for
information regarding backup withholding of federal income
tax and should
consult their own tax advisers as to the tax consequences of an
investment in
the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is
determined each day
during which the Exchange is open for trading. This
determination is made once
each day as of the close of regular trading on the Exchange by
deducting the
amount of the liabilities attributable to the class from the value
of the assets
attributable to that class and dividing the difference by the
number of shares
of the class outstanding. Assets in the Fund's portfolio are
valued on the basis
of their current values or otherwise at their fair values, as
described in the
Statement of Additional Information. All investments and assets
are expressed in
U.S. dollars based upon current currency exchange rates. The net
asset value per
share of each class of shares is effective for orders received
by the dealer
prior to its calculation and received by MFD prior to the close of
that business
day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of four series of the Trust, has two classes of
shares, entitled
Class A and Class B Shares of Beneficial Interest (without par
value). The Trust
has reserved the right to create and issue additional classes
and series of
shares, in which case each class of shares of a series would
participate equally
in the earnings, dividends and assets attributable to that
class of that
particular series. Shareholders are entitled to one vote for each
share held and
shares of each series would be entitled to vote separately to
approve investment
advisory agreements or changes in investment restrictions, but
shares of all
series would vote together in the election of Trustees and
selection of
accountants. Additionally, each class of shares of a series will
vote separately
on any material increases in the fees under its Distribution
Plan or on any
other matter that affects solely that class of shares, but will
otherwise vote
together with all other classes of shares of the series on all
other matters.
The Trust does not intend to hold annual shareholder meetings.
The Declaration
of Trust provides that a Trustee may be removed from office in
certain instances
(see "Description of Shares, Voting Rights and Liabilities" in
the Statement of
Additional Information).
Each share of a class of the Fund represents an equal
proportionate interest in
the Fund with each other class share, subject to the
liabilities of the
particular class. Shares have no pre-emptive or conversion rights
(except as set
forth above in "Purchases -- Conversion of Class B shares").
Shares are fully
paid and non-assessable. Should the Fund be liquidated,
shareholders of each
class are entitled to share pro rata in the net assets allocable
to that class
available for distribution to shareholders. Shares will remain
on deposit with
the Shareholder Servicing Agent and certificates will not be
issued except in
connection with pledges and assignments and in certain
other limited
circumstances.
The Trust is an entity of the type commonly known as a
"Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may,
under certain
circumstances, be held personally liable as partners for its
obligations.
However, the risk of a shareholder incurring financial loss
on account of
shareholder liability is limited to circumstances in which
both inadequate
insurance (e.g., fidelity bonding errors and omissions
insurance) existed and
the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current
distribution rate and
total rate of return quotations for each class of shares and may
also quote fund
rankings in the relevant fund category from various sources, such
as the Lipper
Analytical Services, Inc. and Wiesenberger Investment Companies
Service. Yield
quotations are based on the annualized net investment income per
share allocated
to each class of the Fund over a 30-day period stated as a
percent of the
maximum public offering price of that class on the last day of
that period.
Yield calculations for Class B shares assume no CDSC is paid.
The current
distribution rate for each class is generally based upon the
total amount of
dividends per share paid by the Fund to shareholders of that
class during the
past twelve months and is computed by dividing the amount of such
dividends by
the maximum public offering price of that class at the end of
such period.
Current distribution rate calculations for Class B shares
assume no CDSC is
paid. The current distribution rate differs from the yield
calculation because
it may include distributions to shareholders from sources other
than dividends
and interest, such as premium income from option writing,
short-term capital
gains, and return of invested capital, and is calculated over a
different period
of time. Total rate of return quotations will reflect the
average annual
percentage change over stated periods in the value of an
investment in each
class of shares of the Fund made at the maximum public offering
price of the
shares of that class with all distributions reinvested and which,
if quoted for
periods of six years or less, will give effect to the
imposition of the CDSC
assessed upon redemptions of the Fund's Class B shares. Such
total rate of
return quotations may be accompanied by quotations which do
not reflect the
reduction in value of the initial investment due to the sales
charge or the
deduction of a CDSC, and which will thus be higher. All
performance quotations
are based on historical performance and are not intended to
indicate future
performance. Yield reflects only net portfolio income as of a
stated time and
current distribution rate reflects only the rate of
distributions paid by the
Fund over a stated period of time while total rate of return
reflects all
components of investment return over a stated period of
time. The Fund's
quotations may from time to time be used in advertisements,
shareholder reports
or other communications to shareholders. For a discussion of the
manner in which
the Fund will calculate its yield, current distribution rate, and
total rate of
return, see the Statement of Additional Information. For
further information
about the Fund's performance for the fiscal year ended November
30, 1994, please
see the Fund's Annual Report. A copy of the Annual Report
may be obtained
without charge by contacting the Shareholder Servicing Agent (see
back cover for
address and phone number). In addition to information provided
in shareholder
reports, the Fund may, in its discretion, from time to time, make
a list of all
or a portion of it holdings available to investors upon request.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services
described below
or concerning other aspects of the Fund should contact the
Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder
will receive
confirmation statements showing the transaction activity in
his account.
Cancelled checks, if any, will be sent to shareholders monthly.
At the end of
each calendar year, each shareholder will receive income
tax information
regarding reportable dividends and capital gain distributions for
that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available
to all accounts
(except Systematic Withdrawal Plan accounts) and may be
changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends 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 (except as
provided below)
reinvested in additional shares;
-- Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time
to time make
distributions from short-term capital gains on a monthly
basis, and to the
extent such gains are distributed monthly, they shall be paid
in cash; any
remaining short-term capital gains not so distributed shall be
reinvested in
additional shares.
Reinvestments (net of any tax withholding) will be made in
additional full and
fractional shares of the same class of shares at the net asset
value in effect
at the close of business on the record date. Checks for
dividends and capital
gains distributions in amounts less than $10 will automatically be
reinvested in
additional Shares of the Fund. If a shareholder has elected to
receive dividends
and/or capital gain distributions in cash and the postal or
other delivery
service is unable to deliver checks to the shareholder's address
of record, such
shareholder's distribution option will automatically be converted
to having all
dividends and other distributions reinvested in additional
shares. Any request
to change a distribution option must be received by the
Shareholder Servicing
Agent by the record date for a dividend or distribution in order
to be effective
for that dividend or distribution. No interest will
accrue on amounts
represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of
shareholders, the
Fund makes available the following programs designed to enable
shareholders to
add to their investment in an account with the Fund or withdraw
from it with a
minimum of paper work. The programs involve no extra charge to
shareholders
(other than a sales charge in the case of certain Class A share
purchases) and
may be changed or discontinued at any time by a shareholder or the
Fund.
LETTER OF INTENT: If a shareholder (other than a group
purchaser as
described in the Statement of Additional Information)
anticipates purchasing
$100,000 or more of Class A shares of the Fund alone or in
combination with all
classes of shares of other MFS Funds or MFS Fixed Fund within a
13-month period
(or 36-month period for purchases of $1 million or more), the
shareholder may
obtain such shares at the same reduced sales charge as though the
total quantity
were invested in one lump sum, subject to escrow agreements and
the appointment
of an attorney for redemptions from the escrow amount if the
intended purchases
are not completed, by completing the Letter of Intent section
of the Account
Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for
cumulative quantity
discounts on purchases of Class A shares when his new investment,
together with
the current offering price value of all holdings of all
shares of that
shareholder in the MFS Funds or MFS Fixed Fund reaches a discount
level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular
class of the Fund
may be sold at net asset value (and without any applicable
CDSC) through the
automatic reinvestment of dividend and capital gain distributions
from the same
class of another MFS Fund. Furthermore, distributions made by
the Fund may be
automatically invested at net asset value (and without any
applicable CDSC) in
shares of the same class of another MFS Fund, if shares of
such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct
the Shareholder
Servicing Agent to send him (or anyone he designates) regular
periodic payments,
as designated on the Account Application and based upon the
value of his
account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at
least $100, except in certain limited circumstances. The
aggregate withdrawals
of Class B shares in any year pursuant to a SWP will not be
subject to a CDSC
and are generally limited to 10% of the value of the account at
the time of the
establishment of the SWP. The CDSC will not be waived in
the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or
more may be made
through a shareholder's checking account twice monthly, monthly
or quarterly.
Required forms are available from the Shareholder Servicing Agent
or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account
balances of at least
$5,000 in any MFS Fund or may exchange their shares for the same
class of shares
of the other MFS Funds under the Automatic Exchange Plan,
a dollar cost
averaging program. The Automatic Exchange Plan provides for
automatic monthly or
quarterly exchanges of funds from the shareholder's account in
an MFS Fund for
investment in the same class of shares of other MFS Funds
selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at
least $50 each
may be made to up to four different funds. A shareholder should
consider the
objectives and policies of a fund and review its prospectus
before electing to
exchange money into such fund through the Automatic
Exchange Plan. No
transaction fee is imposed in connection with exchange
transactions under the
Automatic Exchange Plan. However, exchanges of shares of MFS
Money Market Fund,
MFS Government Money Market Fund or Class A shares of MFS Cash
Reserve Fund will
be subject to any applicable sales charge. For federal and
(generally) state
income tax purposes, an exchange is treated as a sale of the
shares exchanged
and, therefore, could result in a capital gain or loss to the
shareholder making
the exchange. See the Statement of Additional Information
for further
information concerning the Automatic Exchange Plan. Investors
should consult
their tax advisers for information regarding the potential capital
gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic
purchases of shares
regardless of fluctuating share offering prices, a shareholder
should consider
his financial ability to continue his purchases through
periods of low price
levels. Maintaining a dollar cost averaging program
concurrently with a
withdrawal program could be disadvantageous because of the
sales charges
included in share purchases in the case of Class A shares, and
because of the
assessment of the CDSC for certain share redemptions in the
case of Class B
shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be
purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA
plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-
sharing plans.
Investors should consult with their tax adviser before
establishing any of the
tax-deferred retirement plans described above.
-----------------
The Fund's Statement of Additional Information, dated April 1,
1995, contains
more detailed information about the Trust and the Fund
including, but not
limited to, information related to (i) investment objective,
policies and
restrictions, including the purchase and sale of options,
Futures Contracts,
Options on Futures Contracts, Forward Contracts and
Options on Foreign
Currencies, (ii) the Trustees, officers and investment adviser,
(iii) portfolio
trading, (iv) the Fund's shares, including rights and
liabilities of
shareholders, (v) tax status of dividends and distributions,
(vi) the Class A
and Class B Distribution Plans, (vii) the method used to
calculate yield,
current distribution rate and total rate of return quotations and
(viii) various
services and privileges provided by the Fund for the
benefit of its
shareholders, including additional information with respect
to the exchange
privilege.
<PAGE>
APPENDIX A
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.
<PAGE>
APPENDIX B
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN
U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds
deposited in a
bank (including eligible foreign branches of U.S. banks), are
for a definite
period of time, earn a specified rate of return and are normally
negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit
instruments used to
finance the import, export, transfer or storage of goods.
They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by
corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by
corporations in order
to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned
by S&P, and
issues so rated are regarded as having the greatest capacity for
timely payment.
Issues in the "A" category are delineated with the numbers
1, 2 and 3 to
indicate the relative degree of safety. The A-1 designation
indicates that the
degree of safety regarding timely payment is either overwhelming
or very strong.
Those A-1 issues determined to possess overwhelming safety
characteristics will
be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating
assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1
repayment capacity
will normally be evidenced by the following characteristics: (1)
leading market
positions in well established industries; (2) high rates of
return on funds
employed; (3) conservative capitalization structure with
moderate reliance on
debt and ample asset protection; (4) broad margins in earnings
coverage of fixed
financial charges and high internal cash generation; and (5)
well established
access to a range of financial markets and assured sources
of alternate
liquidity.
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street,
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street,
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street,
Boston, MA 02116
Toll free: 800-225-2606
Mailing Address:
P.O. Box 2281,
Boston, MA 02107-9906
Independent Accountants
Deloitte & Touche LLP
125 Summer Street,
Boston, MA 02110
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) INTERMEDIATE INCOME FUND
500 Boylston Street,
Boston, MA 02116
MII-1-4/94/89M 5/205
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R)
INTERMEDIATE
INCOME
FUND
PROSPECTUS
April 1, 1995
<PAGE>
MFS INTERMEDIATE INCOME FUND
(a series of MFS SERIES TRUST II)
Supplement to be affixed to the current
Prospectus for distribution in Iowa
For shares designated as Class B purchased after September 1,
1993, a contingent
deferred sales charge declining from 4% to 0% will be imposed
if the investor
redeems within six years from the date of purchase. In addition,
the Class is
subject to an annual distribution and service fee of 1% of its
average daily net
assets.
The date of this Supplement is April 1, 1995.
<PAGE>
MFS INTERMEDIATE INCOME FUND
(a series of MFS SERIES TRUST II)
Supplement to be affixed to the current
Prospectus for distribution in Ohio
Prospective Ohio investors should note the following:
The Fund may purchase the securities of any issuer such that, as
to 50% of the
value of the Fund's 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.
The date of this Supplement is April 1, 1995.
<PAGE>
MFS(R) INTERMEDIATE
STATEMENT OF
INCOME FUND
ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R))
April 1, 1995
- ------------------------------------------------------------------
- ------------
Page
- ----
1. Definitions ...............................................
2
2. Investment Techniques .....................................
2
3. Investment Restrictions ...................................
11
4. Management of the Fund ....................................
12
Trustees ...............................................
12
Officers ...............................................
12
Investment Adviser .....................................
13
Custodian ..............................................
13
Shareholder Servicing Agent ............................
14
Distributor ............................................
14
5. Portfolio Transactions and Brokerage Commissions ..........
14
6. Shareholder Services ......................................
15
Investment and Withdrawal Programs .....................
15
Exchange Privilege .....................................
17
Tax-Deferred Retirement Plans ..........................
18
7. Tax Status ................................................
18
8. Determination of Net Asset Value and Performance ..........
20
9. Distribution Plans ........................................
22
10. Description of Shares, Voting Rights and Liabilities ......
23
11. Independent Accountants and Financial Statements ..........
24
Appendix A ................................................
25
MFS INTERMEDIATE INCOME FUND
A Series of MFS Series Trust II
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets
forth information
which may be of interest to investors but which is not
necessarily included in
the Fund's Prospectus, dated April 1, 1995. This SAI
should be read in
conjunction with the Prospectus, a copy of which may be obtained
without charge
by contacting the Shareholder Servicing Agent (see back cover
for address and
phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS Intermediate Income Fund, a
non-diversified
series of MFS Series Trust II (the
"Trust"), a
Massachusetts business trust. Until
June 3, 1993,
the Fund was known as MFS Lifetime
Intermediate
Income Fund and was known as Lifetime
Intermediate
Income Trust prior to August 3,
1992. The Fund
became a series of the Trust on June
3, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services
Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" -- The Prospectus, dated April 1, 1995,
of the Fund.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the
Prospectus. In
addition, certain of the Fund's investment policies are
described in greater
detail below.
LENDING OF SECURITIES
The Fund may seek to increase its income by lending portfolio
securities. Such
loans will usually be made only to member banks of the Federal
Reserve System
and to member firms (and subsidiaries thereof) of the New York
Stock Exchange
(the "Exchange") and would be required to be secured continuously
by collateral
in cash, cash equivalents, or U.S. Government 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
usually not exceed
five days). During the existence of a loan, the Fund would
continue to receive
the equivalent of the interest or dividends paid by the issuer on
the securities
loaned and would also receive compensation based on
investment of the
collateral. The Fund would not, however, have the right to vote
any securities
having voting rights during the existence of the loan, but would
call the loan
in anticipation of an important vote to be taken among holders of
the securities
or of the giving or withholding of their consent on a material
matter affecting
the investment. As with other extensions of credit, there are
risks of delay in
recovery or even loss of rights in the collateral should the
borrower fail
financially. However, the loans would be made only to firms
deemed by the
Adviser to be of good standing, and when, in the judgment of the
Adviser, the
consideration which could be earned currently from securities
loans of this type
justifies the attendant risk. If the Adviser determines to
make securities
loans, it is not intended that the value of the securities
loaned would exceed
20% of the value of the Fund's total assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a
"forward delivery"
basis. It is expected that, under normal circumstances, the
Fund will take
delivery of such securities. When the Fund commits to purchase a
security on a
"when-issued" or on a "forward delivery" basis, it will set
up procedures
consistent with the General Statement of Policy of the
Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that
policy currently
recommends that an amount of the Fund's assets equal to the
amount of the
purchase be held aside or segregated to be used to pay for the
commitment, the
Fund will always have cash, short-term money market instruments
or high quality
debt securities sufficient to cover any commitments or to limit
any potential
risk. However, although the Fund does not intend to make such
purchases for
speculative purposes and intends to adhere to SEC policies,
purchases of
securities on such bases may involve more risk than other types
of purchases.
For example, the Fund may have to sell assets which have been set
aside in order
to meet redemptions. Also, if the Fund determines it is
necessary to sell the
"when-issued" or "forward delivery" securities before delivery,
it may incur a
loss because of market fluctuations since the time the
commitment to purchase
such securities was made and any gain would not be tax-exempt.
When the time
comes to pay for "when-issued" or "forward delivery" securities,
the Fund will
meet its obligations from the then-available cash flow on
the sale of
securities, or, although it would not normally expect to do so,
from the sale of
the "when-issued" or "forward delivery" securities themselves
(which may have a
value greater or less than the Fund's payment obligation).
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund may enter into
repurchase agreements
with sellers who are member firms (or subsidiaries thereof) of
the Exchange,
members of the Federal Reserve System, recognized primary
U.S. Government
securities dealers or institutions which the Adviser has
determined to be of
comparable creditworthiness. The securities that the Fund
purchases and holds
through its agent are U.S. Government securities, the values,
including accrued
interest, of which are equal to or greater than the repurchase
price agreed to
be paid by the seller. The repurchase price may be higher than
the purchase
price, the difference being income to the Fund, or the purchase
and repurchase
prices may be the same, with interest at a standard rate
due to the Fund
together with the repurchase price on repurchase. In either case,
the income to
the Fund is unrelated to the interest rate on the U.S. Government
securities.
The repurchase agreement provides that in the event the seller
fails to pay the
price agreed upon on the agreed upon delivery date or upon
demand, as the case
may be, the Fund will have the right to liquidate the securities.
If at the time
the Fund is contractually entitled to exercise its right to
liquidate the
securities, the seller is subject to a proceeding under the
bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's
exercise of its
right to liquidate the securities may be delayed and result in
certain losses
and costs to the Fund. The Fund has adopted and follows
procedures which are
intended to minimize the risks of repurchase agreements. For
example, the Fund
only enters into repurchase agreements after the Adviser has
determined that the
seller is creditworthy, and the Adviser monitors the seller's
creditworthiness
on an ongoing basis. Moreover, under such agreements, the
value, including
accrued interest, of the securities (which are marked to market
every business
day) is required to be greater than the repurchase price, and
the Fund has the
right to make margin calls at any time if the value of the
securities falls
below the agreed upon margin.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
As described in the Prospectus, the Fund may enter into mortgage
"dollar roll"
transactions pursuant to which it sells mortgage-backed securities
for
delivery in the future and simultaneously contracts to repurchase
substantially similar securities on a specified future date.
During the roll
period, the Fund foregoes principal and interest paid on the
mortgage-backed
securities. The Fund is compensated for the lost principal and
interest by the
difference between the current sales price and the lower price for
the future
purchase (often referred to as the "drop") as well as by the
interest earned
on the cash proceeds of the initial sale. The Fund may also be
compensated by
receipt of a commitment fee.
INDEXED SECURITIES: The Fund may purchase securities whose prices
are indexed to
the prices of other securities, securities indices, currencies,
precious metals
or other commodities, or other financial indicators. Indexed
securities may
include securities that have embedded swap agreements (see
"Swaps and Related
Transactions") and 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. Gold-indexed securities, for example,
typically provide
for a maturity value that depends on the price of gold, resulting
in a security
whose price tends to rise and fall together with gold prices.
Currency-indexed
securities typically are short-term to intermediate- term debt
securities whose
maturity values or interest rates are determined by reference to
the values of
one or more specified foreign currencies, and may offer higher
yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-
indexed securities
may be positively or negatively indexed; that is, their
maturity value may
increase when the specified currency value increases, resulting
in a security
that performs similarly to a foreign- denominated instrument, or
their maturity
value may decline when foreign currencies increase, resulting
in a security
whose price characteristics are similar to a put on the
underlying currency.
Currency-indexed securities may also have prices that depend on
the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great
extent on the
performance of the security, currency, or other instrument to
which they are
indexed, and may also be influenced by interest rate changes
in the U.S. and
abroad. At the same time, indexed securities are subject to
the credit risks
associated with the issuer of the security, and their values
may decline
substantially if the issuer's creditworthiness deteriorates.
Recent issuers of
indexed securities have included banks, corporations, and
certain U.S.
government agencies.
STRIPPED MORTGAGE-BACKED SECURITIES
As described in the Prospectus, 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 while the
other class will
receive all of the principal. 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.
FOREIGN SECURITIES
The Fund may invest up to 50% of its total assets in
Foreign Government
Securities of issuers considered stable by the Adviser. As
discussed in the
Prospectus, investing in foreign securities generally presents a
greater degree
of risk than investing in domestic securities due to possible
exchange rate
fluctuations, less publicly available information, more volatile
markets, less
securities regulation, less favorable tax provisions, war or
expropriation. As a
result of its investments in foreign securities, the Fund may
receive interest
or dividend payments, or the proceeds of the sale or
redemption of such
securities, in the foreign currencies in which such securities
are denominated.
Under certain circumstances, such as where the Adviser
believes that the
applicable exchange rate is unfavorable at the time the
currencies are received
or the Adviser anticipates, for any other reason, that the
exchange rate will
improve, the Fund may hold such currencies for an indefinite
period of time. The
Fund may also hold foreign currency in anticipation of
purchasing foreign
securities. While the holding of currencies will permit
the Fund to take
advantage of favorable movements in the applicable exchange rate,
such strategy
also exposes the Fund to risk of loss if exchange rates move
in a direction
adverse to the Fund's position. Such losses could reduce any
profits or increase
any losses sustained by the Fund from the sale or redemption of
securities and
could reduce the dollar value of interest or dividend payments
received.
SWAPS AND RELATED TRANSACTIONS -- The Fund may enter into
interest rate swaps,
currency swaps and other types of available swap agreements,
such as caps,
collars and floors.
Swap agreements may be individually negotiated and
structured to include
exposure to a variety of different types of investments or
market factors.
Depending on their structure, swap agreements may increase
or decrease the
Fund's exposure to long or short-term interest rates (in the
U.S. or abroad),
foreign currency values, mortgage securities, corporate
borrowing rates, or
other factors such as securities prices or inflation rates. Swap
agreements can
take many different forms and are known by a variety of names.
The Fund is not
limited to any particular form or variety of swap agreement if MFS
determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with
its custodian to
cover its current obligations under swap transactions. If the Fund
enters into a
swap agreement on a net basis (i.e., the two payment streams
are netted out,
with the Fund receiving or paying, as the case may be, only the
net amount of
the two payments), the Fund will maintain cash or liquid
assets with its
Custodian with a daily value at least equal to the excess, if any,
of the Fund's
accrued obligations under the swap agreement over the accrued
amount the Fund is
entitled to receive under the agreement. If the Fund
enters into a swap
agreement on other than a net basis, it will maintain cash or
liquid assets with
a value equal to the full amount of the Fund's accrued
obligations under the
agreement.
The most significant factor in the performance of swaps,
caps, floors and
collars is the change in the specific interest rate, currency
or other factor
that determines the amount of payments to be made under the
arrangement. If MFS
is incorrect in its forecasts of such factors, the investment
performance of the
Fund would be less than what it would have been if these
investment techniques
had not been used. If a swap agreement calls for payments by the
Fund, the Fund
must be prepared to make such payments when due. In
addition, if the
counterparty's creditworthiness declined, the value of the swap
agreement would
be likely to decline, potentially resulting in losses. If the
counterparty
defaults, the Fund's risk of loss consists of the net amount of
payments that
the Fund is contractually entitled to receive. The Fund
anticipates that it will
be able to eliminate or reduce its exposure under these
arrangements by
assignment or other disposition or by entering into an offsetting
agreement with
the same or another counterparty.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may
write covered
call and put options and purchase call and put options on
securities. Call and
put options written by the Fund may be covered in the manner set
forth below.
A call option written by the Fund is "covered" if the Fund owns
the security
underlying the call or has an absolute and immediate right to
acquire that
security without additional cash consideration (or for
additional cash
consideration held in a segregated account by its custodian) upon
conversion or
exchange of other securities held in its portfolio. A call
option is also
covered if the Fund holds a call on the same security and in the
same principal
amount as the call written where the exercise price of the
call held (a) is
equal to or less than the exercise price of the call written or
(b) is greater
than the exercise price of the call written if the difference is
maintained by
the Fund in cash, short-term money market instruments or high
quality debt
securities in a segregated account with its custodian. A put
option written by
the Fund is "covered" if the Fund maintains cash, short-term
money market
instruments or high quality debt securities with a value equal
to the exercise
price in a segregated account with its custodian, or else
holds a put on the
same security and in the same principal amount as the put
written where the
exercise price of the put held is equal to or greater than the
exercise price of
the put written or where the exercise price of the put held is
less than the
exercise price of the put written if the difference is maintained
by the Fund in
cash, short-term money market instruments or high quality debt
securities in a
segregated account with its custodian. Put and call options
written by the Fund
may also be covered in such other manner as may be in
accordance with the
requirements of the exchange on which, or the counter party
with which, the
option is traded, and applicable laws and regulations. If
the writer's
obligation is not so covered, it is subject to the risk of the
full change in
value of the underlying security from the time the option is
written until
exercise.
Effecting a closing transaction in the case of a written call
option will permit
the Fund to write another call option on the underlying security
with either a
different exercise price or expiration date or both, or in the
case of a written
put option will permit the Fund to write another put option to
the extent that
the exercise price thereof is secured by deposited cash, short-
term money market
instruments or high quality debt securities. Such transactions
permit the Fund
to generate additional premium income, which will partially
offset declines in
the value of portfolio securities or increases in the cost of
securities to be
acquired. Also, effecting a closing transaction will permit the
cash or proceeds
from the concurrent sale of any securities subject to the option
to be used for
other investments of the Fund, provided that another option on
such security is
not written. If the Fund desires to sell a particular
security from its
portfolio on which it has written a call option, it will
effect a closing
transaction in connection with the option prior to or concurrent
with the sale
of the security.
The Fund will realize a profit from a closing transaction if the
premium paid in
connection with the closing of an option written by the Fund is
less than the
premium received from writing the option, or if the premium
received in
connection with the closing of an option purchased by the Fund is
more than the
premium paid for the original purchase. Conversely, the Fund will
suffer a loss
if the premium paid or received in connection with a closing
transaction is more
or less, respectively, than the premium received or paid in
establishing the
option position. Because increases in the market price of a
call option will
generally reflect increases in the market price of the underlying
security, any
loss resulting from the repurchase of a call option previously
written by the
Fund is likely to be offset in whole or in part by
appreciation of the
underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that
is, the Fund may purchase a security and then write a call option
against that
security. The exercise price of the call the Fund determines
to write will
depend upon the expected price movement of the underlying
security. The exercise
price of a call option may be below ("in-the-money"), equal to
("at- the-money")
or above ("out-of-the-money") the current value of the
underlying security at
the time the option is written. Buy-and-write transactions
using in-the-money
call options may be used when it is expected that the price of
the underlying
security will decline moderately during the option period.
Buy- and-write
transactions using out-of-the-money call options may be used when
it is expected
that the premiums received from writing the call option plus the
appreciation in
the market price of the underlying security up to the exercise
price will be
greater than the appreciation in the price of the underlying
security alone. If
the call options are exercised in such transactions, the Fund's
maximum gain
will be the premium received by it for writing the option,
adjusted upwards or
downwards by the difference between the Fund's purchase price
of the security
and the exercise price, less related transaction costs. If the
options are not
exercised and the price of the underlying security declines, the
amount of such
decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms
of risk/return
characteristics to buy-and-write transactions. If the market
price of the
underlying security rises or otherwise is above the exercise
price, the put
option will expire worthless and the Fund's gain will be limited
to the premium
received, less related transaction costs. If the market price of
the underlying
security declines or otherwise is below the exercise price, the
Fund may elect
to close the position or retain the option until it is exercised,
at which time
the Fund will be required to take delivery of the security at
the exercise
price; the Fund's return will be the premium received from the
put option minus
the amount by which the market price of the security is below
the exercise
price, which could result in a loss. Out-of-the-money, at-
the-money and
in-the-money put options may be used by the Fund in the same
market environments
that call options are used in equivalent buy-and-write
transactions.
The Fund may also write combinations of put and call
options on the same
security, known as "straddles," with the same exercise price
and expiration
date. By writing a straddle, the Fund undertakes a simultaneous
obligation to
sell and purchase the same security in the event that one of
the options is
exercised. If the price of the security subsequently rises
sufficiently above
the exercise price to cover the amount of the premium and
transaction costs, the
call will likely be exercised and the Fund will be
required to sell the
underlying security at a below market price. This loss may be
offset, however,
in whole or part, by the premiums received on the writing of
the two options.
Conversely, if the price of the security declines by a sufficient
amount, the
put will likely be exercised. The writing of straddles will likely
be effective,
therefore, only where the price of the security remains stable
and neither the
call nor the put is exercised. In those instances where one of
the options is
exercised, the loss on the purchase or sale of the underlying
security may
exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to
profit from any
increase in the market value of the underlying security above the
exercise price
of the option. By writing a put option, the Fund assumes the risk
that it may be
required to purchase the underlying security for an exercise
price above its
then current market value, resulting in a capital loss
unless the security
subsequently appreciates in value. The writing of options on
securities will not
be undertaken by the Fund solely for hedging purposes, and could
involve certain
risks which are not present in the case of hedging transactions.
Moreover, even
where options are written for hedging purposes, such
transactions constitute
only a partial hedge against declines in the value of portfolio
securities or
against increases in the value of securities to be acquired, up to
the amount of
the premium.
The Fund may purchase options for hedging purposes or to
increase its return.
Put options may be purchased to hedge against a decline in
the value of
portfolio securities. If such decline occurs, the put options
will permit the
Fund to sell the securities at the exercise price, or to close
out the options
at a profit. By using put options in this way, the Fund will
reduce any profit
it might otherwise have realized in the underlying security by the
amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase
in the price of
securities that the Fund anticipates purchasing in the future. If
such increase
occurs, the call option will permit the Fund to purchase the
securities at the
exercise price, or to close out the options at a profit. The
premium paid for
the call option plus any transaction costs will reduce the
benefit, if any,
realized by the Fund upon exercise of the option, and, unless
the price of the
underlying security rises sufficiently, the option may expire
worthless to the
Fund.
In certain instances, the Fund may enter into options on
U.S. Treasury
securities which provide for periodic adjustment of the strike
price and may
also provide for the periodic adjustment of the premium during
the term of each
such option. Like other types of options, these transactions,
which may be
referred to as "reset" options or "adjustable strike
options," grant the
purchaser the right to purchase (in the case of a "call") or
sell (in the case
of a "put"), a specified type and series of U.S. Treasury
security at any time
up to a stated expiration date (or, in certain instances, on
such date). In
contrast to other types of options, however, the price at which
the underlying
security may be purchased or sold under a "reset" option is
determined at
various intervals during the term of the option, and such price
fluctuates from
interval to interval based on changes in the market value of
the underlying
security. As a result, the strike price of a "reset" option,
at the time of
exercise, may be less advantageous to the Fund than if the strike
price had been
fixed at the initiation of the option. In addition, the
premium paid for the
purchase of the option may be determined at the termination,
rather than the
initiation, of the option. If the premium is paid at
termination, the Fund
assumes the risk that (i) the premium may be less than the
premium which would
otherwise have been received at the initiation of the option
because of such
factors as the volatility in yield of the underlying Treasury
security over the
term of the option and adjustments made to the strike price of
the option, and
(ii) the option purchaser may default on its obligation to pay
the premium at
the termination of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund
may enter into
interest rate futures contracts and/or foreign currency futures
contracts. The
Fund may also enter into futures contracts based on financial
indices including
any index of U.S. or Foreign Government Securities (as
defined in the
Prospectus). (Unless otherwise specified, futures contracts
on financial
indices, interest rate and foreign currency futures contracts
are collectively
referred to as "Futures Contracts.") Such investment strategies
will be used for
hedging purposes and for non-hedging purposes, subject to
applicable law. A
Futures Contract is a bilateral agreement providing for the
purchase and sale of
a specified type and amount of a financial instrument or foreign
currency, or
for the making and acceptance of a cash settlement, at a
stated time in the
future for a fixed price. By its terms, a Futures Contract
provides for a
specified settlement date on which, in the case of the majority of
interest rate
and foreign currency futures contracts, the fixed income security
or currency is
delivered by the seller and paid for by the purchaser, or on
which, in the case
of certain interest rate and foreign currency futures contracts,
the difference
between the price at which the contract was entered into and
the contract's
closing value is settled between the purchaser and seller in
cash. Futures
Contracts differ from options in that they are bilateral
agreements, with both
the purchaser and the seller equally obligated to complete the
transaction.
Futures Contracts call for settlement only on the expiration date
and cannot be
"exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the
purchase or sale of
a security or the purchase of an option in that no purchase
price is paid or
received. Instead, an amount of cash or cash equivalents, which
varies but may
be as low as 5% or less of the value of the contract, must be
deposited with the
broker as "initial margin." Subsequent payments to and from the
broker, referred
to as "variation margin," are made on a daily basis as the value
of the index or
instrument underlying the Futures Contract fluctuates, making
positions in the
Futures Contract more or less valuable -- a process known as
"marking to the
market."
Interest rate futures contracts may be purchased or sold to
attempt to protect
against the effects of interest rate changes on the Fund's
current or intended
investments in fixed income securities. For example, if the
Fund owned long-
term bonds and interest rates were expected to increase, the
Fund might enter
into interest rate futures contracts for the sale of debt
securities. Such a
sale would have much the same effect as selling some of the long-
term bonds in
the Fund's portfolio. If interest rates did increase, the
value of the debt
securities in the portfolio would decline, but the value of the
Fund's interest
rate futures contracts would increase at approximately the same
rate, thereby
keeping the net asset value of the Fund from declining as much
as it otherwise
would have.
Similarly, if interest rates were expected to decline,
interest rate futures
contracts may be purchased to hedge in anticipation of subsequent
purchases of
long-term bonds at higher prices. Since the fluctuations in
the value of the
interest rate futures contracts should be similar to that of long-
term bonds the
Fund could protect itself against the effects of the
anticipated rise in the
value of long-term bonds without actually buying them until the
necessary cash
became available or the market had stabilized. At that time, the
interest rate
futures contracts could be liquidated and the Fund's cash reserves
could then be
used to buy long-term bonds on the cash market. The Fund
could accomplish
similar results by selling bonds with long maturities and
investing in bonds
with short maturities when interest rates are expected to
increase. However,
since the futures market is more liquid than the cash
market, the use of
interest rate futures contracts as a hedging technique allows the
Fund to hedge
its interest rate risk without having to sell its portfolio
securities.
As noted in the Prospectus, the Fund may purchase and sell
foreign currency
futures contracts for hedging purposes, to attempt to protect
its current or
intended investments from fluctuations in currency exchange
rates. Such
fluctuations could reduce the dollar value of portfolio
securities denominated
in foreign currencies, or increase the cost of foreign-denominated
securities to
be acquired, even if the value of such securities in the
currencies in which
they are denominated remains constant. The Fund may sell futures
contracts on a
foreign currency, for example, where it holds securities
denominated in such
currency and it anticipates a decline in the value of such
currency relative to
the dollar. In the event such decline occurs, the resulting
adverse effect on
the value of foreign-denominated securities may be offset, in
whole or in part,
by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the
dollar cost of
foreign-denominated securities to be acquired by purchasing
futures contracts on
the relevant currency, which could offset, in whole or in part,
the increased
cost of such securities resulting from a rise in the dollar
value of the
underlying currencies. Where the Fund purchases futures
contracts under such
circumstances, however, and the prices of securities to be
acquired instead
decline, the Fund will sustain losses on its futures position
which could reduce
or eliminate the benefits of the reduced cost of portfolio
securities to be
acquired.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus,
the Fund may
purchase and write options to buy or sell futures contracts
in which it may
invest ("Options on Futures Contracts"). Such investment
strategies will be used
for hedging purposes and for non-hedging purposes, subject to
applicable law.
An Option on a Futures Contract provides the holder with the right
to enter into
a "long" position in the underlying Futures Contract, in the
case of a call
option, or a "short" position in the underlying Futures Contract,
in the case of
a put option, at a fixed exercise price up to a stated
expiration date or, in
the case of certain options, on such date. Upon exercise of the
option by the
holder, the contract market clearinghouse establishes a
corresponding short
position for the writer of the option, in the case of a call
option, or a
corresponding long position in the case of a put option. In the
event that an
option is exercised, the parties will be subject to all the
risks associated
with the trading of Futures Contracts, such as payment of initial
and variation
margin deposits. In addition, the writer of an Option on a
Futures Contract,
unlike the holder, is subject to initial and variation margin
requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by
the purchaser
or seller prior to expiration by effecting a closing
purchase or sale
transaction, subject to the availability of a liquid secondary
market, which is
the purchase or sale of an option of the same series (i.e., the
same exercise
price and expiration date) as the option previously purchased
or sold. The
difference between the premiums paid and received represents the
trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by
the Fund on U.S.
exchanges are traded on the same contract market as the
underlying Futures
Contract, and, like Futures Contracts, are subject to regulation
by the CFTC and
the performance guarantee of the exchange clearinghouse. In
addition, Options on
Futures Contracts may be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures
Contracts (a) through
purchases of the underlying Futures Contract, (b) through
ownership of the
instrument, or instruments included in the index, underlying
the Futures
Contract, or (c) through the holding of a call on the same
Futures Contract and
in the same principal amount as the call written where the
exercise price of the
call held (i) is equal to or less than the exercise price of the
call written or
(ii) is greater than the exercise price of the call written if the
difference is
maintained by the Fund in cash or securities in a segregated
account with its
custodian. The Fund may cover the writing of put Options on
Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through
segregation of
cash, short-term money market instruments or high quality debt
securities in an
amount equal to the value of the security or index underlying
the Futures
Contract, or (c) through the holding of a put on the same Futures
Contract and
in the same principal amount as the put written where the
exercise price of the
put held is equal to or greater than the exercise price of the
put written or
where the exercise price of the put held is less than the
exercise price of the
put written if the difference is maintained by the Fund in
cash, short-term
money market instruments or high quality debt securities in a
segregated account
with its custodian. Put and call Options on Futures
Contracts may also be
covered in such other manner as may be in accordance with
the rules of the
exchange on which the option is traded and applicable laws and
regulations. Upon
the exercise of a call Option on a Futures Contract written by
the Fund, the
Fund will be required to sell the underlying Futures Contract
which, if the Fund
has covered its obligation through the purchase of such Contract,
will serve to
liquidate its futures position. Similarly, where a put
Option on a Futures
Contract written by the Fund is exercised, the Fund will be
required to purchase
the underlying Futures Contract which, if the Fund has covered
its obligation
through the sale of such Contract, will close out its futures
position.
The writing of a call Option on a Futures Contract for
hedging purposes
constitutes a partial hedge against declining prices of the
securities or other
instruments required to be delivered under the terms of the
Futures Contract. If
the futures price at expiration of the option is below the
exercise price, the
Fund will retain the full amount of the option premium, less
related transaction
costs, which provides a partial hedge against any decline that may
have occurred
in the Fund's portfolio holdings. The writing of a put
Option on a Futures
Contract constitutes a partial hedge against increasing prices of
the securities
or other instruments required to be delivered under the terms
of the Futures
Contract. If the futures price at expiration of the option is
higher than the
exercise price, the Fund will retain the full amount of the option
premium which
provides a partial hedge against any increase in the price of
securities which
the Fund intends to purchase. If a put or call option the Fund
has written is
exercised, the Fund will incur a loss which will be reduced by the
amount of the
premium it receives. Depending on the degree of correlation
between changes in
the value of its portfolio securities and the changes in the
value of its
futures positions, the Fund's losses from existing Options on
Futures Contracts
may to some extent be reduced or increased by changes in the
value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging
purposes instead
of purchasing or selling the underlying Futures Contracts. For
example, where a
decrease in the value of portfolio securities is anticipated as
a result of a
projected market-wide decline or changes in interest or exchange
rates, the Fund
could, in lieu of selling Futures Contracts, purchase put
options thereon. In
the event that such decrease occurs, it may be offset, in whole
or part, by a
profit on the option. Conversely, where it is projected that
the value of
securities to be acquired by the Fund will increase prior to
acquisition, due to
a market advance or changes in interest or exchange rates,
the Fund could
purchase call Options on Futures Contracts, rather than
purchasing the
underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward
foreign currency
exchange contracts ("Forward Contracts") for hedging and non-
hedging purposes.
Forward Contracts may be used for hedging to attempt to minimize
the risk to the
Fund from adverse changes in the relationship between the
U.S. dollar and
foreign currencies. The Fund intends to enter into Forward
Contracts for hedging
purposes similar to those described above in connection with
foreign currency
futures contracts. In particular, a Forward Contract to sell a
currency may be
entered into in lieu of the sale of a foreign currency futures
contract where
the Fund seeks to protect against an anticipated increase in the
exchange rate
for a specific currency which could reduce the dollar value
of portfolio
securities denominated in such currency. Conversely, the Fund
may enter into a
Forward Contract to purchase a given currency to protect
against a projected
increase in the dollar value of securities denominated in such
currency which
the Fund intends to acquire. The Fund also may enter into a
Forward Contract in
order to assure itself of a predetermined exchange rate in
connection with a
security denominated in a foreign currency. In addition, the Fund
may enter into
Forward Contracts for "cross hedging" purposes; e.g., the
purchase or sale of a
Forward Contract on one type of currency as a hedge against
adverse fluctuations
in the value of a second type of currency.
If a hedging transaction in Forward Contracts is successful, the
decline in the
value of portfolio securities or other assets or the increase
in the cost of
securities or other assets to be acquired may be offset, at
least in part, by
profits on the Forward Contract. Nevertheless, by entering
into such Forward
Contracts, the Fund may be required to forgo all or a portion of
the benefits
which otherwise could have been obtained from favorable
movements in exchange
rates. The Fund does not intend, in most instances, to hold
Forward Contracts
entered into until maturity, at which time it would be required
to deliver or
accept delivery of the underlying currency, but will usually
seek to close out
positions in such contracts by entering into offsetting
transactions, which will
serve to fix the Fund's profit or loss based upon the value of
the contracts at
the time the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts
for other than
hedging purposes, which present greater profit potential
but also involve
increased risk. For example, the Fund may purchase a given
foreign currency
through a Forward Contract if, in the judgment of the Adviser, the
value of such
currency is expected to rise relative to the U.S. dollar.
Conversely, the Fund
may sell the currency through a Forward Contract if the Adviser
believes that
its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign
currency exchange
rates occurs, which will increase its gross income. Where
exchange rates do not
move in the direction or to the extent anticipated, however,
the Fund may
sustain losses which will reduce its gross income. Such
transactions, therefore,
could be considered speculative and could involve significant risk
of loss.
The Fund has established procedures consistent with statements
by the SEC and
its staff regarding the use of Forward Contracts by
registered investment
companies, which require the use of segregated assets or "cover"
in connection
with the purchase and sale of such contracts. In those
instances in which the
Fund satisfies this requirement through segregation of assets, it
will maintain,
in a segregated account, cash, cash equivalents or high quality
debt securities,
which will be marked to market on a daily basis, in an amount
equal to the value
of its commitments under Forward Contracts. While these
contracts are not
presently regulated by the CFTC, the CFTC may in the future
assert authority to
regulate Forward Contracts. In such event, the Fund's ability to
utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES -- As noted in the Prospectus,
the Fund may
purchase and write options on foreign currencies for hedging
purposes in a
manner similar to that in which futures contracts on foreign
currencies, or
Forward Contracts, will be utilized. For example, a decline in
the dollar value
of a foreign currency in which portfolio securities are
denominated will reduce
the dollar value of such securities, even if their value in the
foreign currency
remains constant. In order to protect against such diminutions
in the value of
portfolio securities, the Fund may purchase put options on the
foreign currency.
If the value of the currency does decline, the Fund will have the
right to sell
such currency for a fixed amount in dollars and will thereby
offset, in whole or
in part, the adverse effect on its portfolio which
otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in
which securities
to be acquired are denominated is projected, thereby increasing
the cost of such
securities, the Fund may purchase call options thereon. The
purchase of such
options could offset, at least partially, the effects of the
adverse movements
in exchange rates. As in the case of other types of options,
however, the
benefit to the Fund deriving from purchases of foreign currency
options will be
reduced by the amount of the premium and related transaction
costs. In addition,
where currency exchange rates do not move in the direction or
to the extent
anticipated, the Fund could sustain losses on transactions in
foreign currency
options which would require it to forgo a portion or all of the
benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same
types of hedging
purposes. For example, where the Fund anticipates a decline in
the dollar value
of foreign-denominated securities due to adverse fluctuations in
exchange rates
it could, instead of purchasing a put option, write a call
option on the
relevant currency. If the expected decline occurs, the option
will most likely
not be exercised, and the diminution in value of portfolio
securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against
an anticipated
increase in the dollar cost of securities to be acquired, the Fund
could write a
put option on the relevant currency which, if rates move
in the manner
projected, will expire unexercised and allow the Fund to hedge
such increased
cost up to the amount of the premium. Foreign currency options
written by the
Fund will generally be covered in a manner similar to the
covering of other
types of options. As in the case of other types of options,
however, the writing
of a foreign currency option will constitute only a partial
hedge up to the
amount of the premium, and only if rates move in the expected
direction. If this
does not occur, the option may be exercised and the Fund would
be required to
purchase or sell the underlying currency at a loss which may
not be offset by
the amount of the premium. Through the writing of options on
foreign currencies,
the Fund also may be required to forgo all or a portion of the
benefits which
might otherwise have been obtained from favorable movements in
exchange rates.
RISK FACTORS IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE
FUND'S PORTFOLIO.
The Fund's abilities effectively to hedge all or a portion of
its portfolio
through transactions in options, Futures Contracts,
Options on Futures
Contracts, Forward Contracts and options on foreign currencies
depend on the
degree to which price movements in the underlying index or
instrument correlate
with price movements in the relevant portion of the Fund's
portfolio. In the
case of futures based on an index, the portfolio will not
duplicate the
components of the index, and in the case of futures and options
on fixed income
securities, the portfolio securities which are being hedged may
not be the same
type of obligation underlying such contract. The use of Forward
Contracts for
"cross hedging" purposes may involve greater correlation risks. As
a result, the
correlation probably will not be exact. Consequently, the Fund
bears the risk
that the price of the portfolio securities being hedged will
not move in the
same amount or direction as the underlying index or obligation.
For example, if the Fund purchases a Futures Contract 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 Futures
Contract put
option. It is also possible that there may be a negative
correlation between the
index or obligation underlying a Futures Contract in which
the Fund has a
position and the portfolio securities the Fund is attempting to
hedge, which
could result in a loss on both the portfolio and the hedging
instrument. In
addition, the Fund may enter into transactions in Forward
Contracts or options
on foreign currencies in order to hedge against exposure
arising from the
currencies underlying such forwards. In such instances, the Fund
will be subject
to the additional risk of imperfect correlation between changes
in the value of
the currencies underlying such forwards or options and changes
in the value of
the currencies being hedged.
The trading of Futures Contracts, options and Forward
Contracts for hedging
purposes entails the additional risk of imperfect correlation
between movements
in the futures or option price and the price of the
underlying index or
obligation. The anticipated spread between the prices may be
distorted due to
the differences in the nature of the markets, such as
differences in margin
requirements, the liquidity of such markets and the participation
of speculators
in the options, futures and forward markets. In this
regard, trading by
speculators in options, futures and Forward Contracts has
in the past
occasionally resulted in market distortions, which may be
difficult or
impossible to predict, particularly near the expiration of such
contracts.
The trading of Options on Futures Contracts also entails the
risk that changes
in the value of the underlying Futures Contract will not be
fully reflected in
the value of the option. The risk of imperfect correlation,
however, generally
tends to diminish as the maturity date of the Futures Contract
or expiration
date of the option approaches.
Further, with respect to options on securities, options on
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.
The writing of options on securities or Options on Futures
Contracts constitutes
only a partial hedge against fluctuations in the value of the
Fund's portfolio.
When the Fund writes an option, it will receive premium income in
return for the
holder's purchase of the right to acquire or dispose of
the underlying
obligation. In the event that the price of such obligation
does not rise
sufficiently above the exercise price of the option, in the case
of a call, or
fall below the exercise price, in the case of a put, the
option will not be
exercised and the Fund will retain the amount of the premium,
less related
transaction costs, which will constitute a partial hedge
against any decline
that may have occurred in the Fund's portfolio holdings or any
increase in the
cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently
in favor of the
holder to warrant exercise of the option, however, and the option
is exercised,
the Fund will incur a loss which may only be partially offset by
the amount of
the premium it received. Moreover, by writing an option,
the Fund may be
required to forgo the benefits which might otherwise have been
obtained from an
increase in the value of portfolio securities or other assets
or a decline in
the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse
market events,
the Fund's overall return may be lower than if it had not engaged
in the hedging
transactions.
It should also be noted that the Fund may enter into
transactions in options
(except for options on foreign currencies), Futures
Contracts, Options on
Futures Contracts and Forward Contracts not only for hedging
purposes, but also
for non-hedging purposes intended to increase portfolio returns.
Non- hedging
transactions in such investments involve greater risks and may
result in losses
which may not be offset by increases in the value of portfolio
securities or
declines in the cost of securities to be acquired. The Fund
will only write
covered options, such that cash or securities necessary to
satisfy an option
exercise will be segregated at all times, unless the option is
covered in such
other manner as may be in accordance with the rules of the
exchange on which the
option is traded and applicable laws and regulations.
Nevertheless, the method
of covering an option employed by the Fund may not fully protect
it against risk
of loss and, in any event, the Fund could suffer losses on the
option position
which might not be offset by corresponding portfolio gains.
The Fund also may enter into transactions in Futures
Contracts, Options on
Futures Contracts and Forward Contracts for other than hedging
purposes, which
could expose the Fund to significant risk of loss if foreign
currency exchange
rates do not move in the direction or to the extent anticipated.
In this regard,
the foreign currency may be extremely volatile from time to
time, as discussed
in the Prospectus and in this Statement of Additional
Information, and the use
of such transactions for non-hedging purposes could
therefore involve
significant risk of loss.
With respect to the writing of straddles on securities, the Fund
incurs the risk
that the price of the underlying security will not remain
stable, that one of
the options written will be exercised and that the resulting
loss will not be
offset by the amount of the premiums received. Such
transactions, therefore,
create an opportunity for increased return by providing the
Fund with two
simultaneous premiums on the same security, but involve
additional risk, since
the Fund may have an option exercised against it regardless of
whether the price
of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior
to exercise or
expiration, a futures or option position can only be terminated by
entering into
a closing purchase or sale transaction. This requires a
secondary market for
such instruments on the exchange on which the initial
transaction was entered
into. While the Fund will enter into options or futures positions
only if there
appears to be a liquid secondary market therefor, there can be no
assurance that
such a market will exist for any particular contracts at any
specific time. In
that event, it may not be possible to close out a position held by
the Fund, and
the Fund could be required to purchase or sell the instrument
underlying an
option, make or receive a cash settlement or meet ongoing
variation margin
requirements. Under such circumstances, if the Fund has
insufficient cash
available to meet margin requirements, it will be necessary
to liquidate
portfolio securities or other assets at a time when it is
disadvantageous to do
so. The inability to close out options and futures positions,
therefore, could
have an adverse impact on the Fund's ability effectively to hedge
its portfolio,
and could result in trading losses. The liquidity of a
secondary market in a
Futures Contract or option thereon may be adversely affected
by "daily price
fluctuation limits," established by exchanges, which limit
the amount of
fluctuation in the price of a contract during a single trading
day. Once the
daily limit has been reached in the contract, no trades may be
entered into at a
price beyond the limit, thus preventing the liquidation of
open futures or
option positions and requiring traders to make additional
margin deposits.
Prices have in the past moved the daily limit on a number of
consecutive trading
days.
The trading of Futures Contracts and options is also subject
to the risk of
trading halts, suspensions, exchange or clearinghouse
equipment failures,
government intervention, insolvency of a brokerage firm or
clearinghouse or
other disruptions of normal trading activity, which could at
times make it
difficult or impossible to liquidate existing positions or to
recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon
the opening of a
futures or forward position and the writing of an option, such
transactions
involve substantial leverage. As a result, relatively small
movements in the
price of the contract can result in substantial unrealized
gains or losses.
Where the Fund enters into such transactions for hedging
purposes, any losses
incurred in connection therewith should, if the hedging strategy
is successful,
be offset, in whole or in part, by increases in the value of
securities or other
assets held by the Fund or decreases in the prices of securities
or other assets
the Fund intends to acquire. Where the Fund enters into such
transactions for
other than hedging purposes, the margin requirements
associated with such
transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures
and options are
traded may impose limitations governing the maximum number of
positions on the
same side of the market and involving the same underlying
instrument which may
be held by a single investor, whether acting alone or in
concert with others
(regardless of whether such contracts are held on the same
or different
exchanges or held or written in one or more accounts or
through one or more
brokers). Further, the CFTC and the various contract markets
have established
limits referred to as "speculative position limits" on the
maximum net long or
net short position which any person may hold or control in a
particular futures
or option contract. An exchange may order the liquidation of
positions found to
be in violation of these limits and it may impose other
sanctions or
restrictions. The Adviser does not believe that these trading
and position
limits will have any adverse impact on the strategies for hedging
the portfolio
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk
the Fund assumes
when it purchases an Option on a Futures Contract is the
premium paid for the
option, plus related transaction costs. In order to profit
from an option
purchased, however, it may be necessary to exercise the option
and to liquidate
the underlying Futures Contract, subject to the risks of the
availability of a
liquid offset market described herein. The writer of an
Option on a Futures
Contract is subject to the risks of commodity futures trading,
including the
requirement of initial and variation margin payments, as well as
the additional
risk that movements in the price of the option may not correlate
with movements
in the price of the underlying security, index, currency or
Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND
TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward
Contracts on foreign
currencies, as well as futures and options on foreign
currencies and
transactions executed on foreign exchanges, are subject to
all of the
correlation, liquidity and other risks outlined above. In
addition, however,
such transactions are subject to the risk of governmental
actions affecting
trading in or the prices of currencies underlying such
contracts, which could
restrict or eliminate trading and could have a substantial adverse
effect on the
value of positions held by the Fund. Further, the value of such
positions could
be adversely affected by a number of other complex political
and economic
factors applicable to the countries issuing the underlying
currencies.
Further, unlike trading in most other types of instruments,
there is no
systematic reporting of last sale information with respect
to the foreign
currencies underlying contracts thereon. As a result, the
available information
on which trading systems will be based may not be as complete as
the comparable
data on which the Fund makes investment and trading decisions in
connection with
other transactions. Moreover, because the foreign currency
market is a global,
24-hour market, events could occur in that market which will not
be reflected in
the forward, futures or options markets until the following day,
thereby making
it more difficult for the Fund to respond to such events in a
timely manner.
Settlements of exercises of over-the-counter Forward
Contracts or foreign
currency options generally must occur within the country issuing
the underlying
currency, which in turn requires traders to accept or make
delivery of such
currencies in conformity with any U.S. or foreign restrictions
and regulations
regarding the maintenance of foreign banking relationships, fees,
taxes or other
charges.
Unlike transactions entered into by the Fund in Futures
Contracts and
exchange-traded options, options on foreign currencies, Forward
Contracts and
over-the-counter options on securities are not traded on
contract markets
regulated by the CFTC or (with the exception of certain
foreign currency
options) the SEC. To the contrary, such instruments are traded
through financial
institutions acting as market-makers, although foreign currency
options are also
traded on certain national securities exchanges, such as the
Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC
regulation. In
an over-the-counter trading environment, many of the
protections afforded to
exchange participants will not be available. For example,
there are no daily
price fluctuation limits, and adverse market movements could
therefore continue
to an unlimited extent over a period of time. Although the
purchaser of an
option cannot lose more than the amount of the premium plus
related transaction
costs, this entire amount could be lost. Moreover, the option
writer and a
trader of Forward Contracts could lose amounts substantially in
excess of their
initial investments, due to the margin and collateral
requirements associated
with such positions.
In addition, over-the-counter transactions can only be
entered into with a
financial institution willing to take the opposite side, as
principal, of the
Fund's position unless the institution acts as broker and
is able to find
another counterparty willing to enter into the transaction with
the Fund. Where
no such counterparty is available, it will not be possible
to enter into a
desired transaction. There also may be no liquid secondary market
in the trading
of over-the-counter contracts, and the Fund could be required to
retain options
purchased or written, or Forward Contracts entered into,
until exercise,
expiration or maturity. This in turn could limit the Fund's
ability to profit
from open positions or to reduce losses experienced, and could
result in greater
losses.
Further, over-the-counter transactions are not subject to the
guarantee of an
exchange clearinghouse, and the Fund will therefore be subject
to the risk of
default by, or the bankruptcy of, the financial institution
serving as its
counterparty. One or more of such institutions also may decide
to discontinue
their role as market-makers in a particular currency or
security, thereby
restricting the Fund's ability to enter into desired hedging
transactions. The
Fund will enter into an over-the-counter transaction only with
parties whose
creditworthiness has been reviewed and found satisfactory by the
Adviser.
Options on securities, options on stock indexes, Futures
Contracts, Options on
Futures Contracts and options on foreign currencies may be
traded on exchanges
located in foreign countries. Such transactions may not be
conducted in the same
manner as those entered into on U.S. exchanges, and may be
subject to different
margin, exercise, settlement or expiration procedures. As a
result, many of the
risks of over-the-counter trading may be present in
connection with such
transactions.
Options on foreign currencies traded on national securities
exchanges are within
the jurisdiction of the SEC, as are other securities traded on
such exchanges.
As a result, many of the protections provided to traders on
organized exchanges
will be available with respect to such transactions. In
particular, all foreign
currency option positions entered into on a national securities
exchange are
cleared and guaranteed by the Options Clearing Corporation (the
"OCC"), thereby
reducing the risk of counterparty default. Further, a liquid
secondary market in
options traded on a national securities exchange may be more
readily available
than in the over-the-counter market, potentially permitting
the Fund to
liquidate open positions at a profit prior to exercise or
expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency
options, however, is
subject to the risks of the availability of a liquid secondary
market described
above, as well as the risks regarding adverse market movements,
margining of
options written, the nature of the foreign currency
market, possible
intervention by governmental authorities and the effects of other
political and
economic events. In addition, exchange-traded options on
foreign currencies
involve certain risks not presented by the over-the-counter
market. For example,
exercise and settlement of such options must be made
exclusively through the
OCC, which has established banking relationships in applicable
foreign countries
for this purpose. As a result, the OCC may, if it determines
that foreign
governmental restrictions or taxes would prevent the orderly
settlement of
foreign currency option exercises, or would result in undue
burdens on the OCC
or its clearing member, impose special procedures on exercise
and settlement,
such as technical changes in the mechanics of delivery of
currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES
CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool"
for purposes of
the Commodity Exchange Act, regulations of the CFTC require that
the Fund enter
into transactions in Futures Contracts and Options on Futures
Contracts only (i)
for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin
and premiums on
such non-hedging positions does not exceed 5% of the liquidation
value of the
Fund's assets. In addition, the Fund must comply with the
requirements of
various state securities laws in connection with such
transactions.
The Fund has adopted the additional restriction that it will
not enter into a
Futures Contract if, immediately thereafter, the value of
securities and other
obligations underlying all such Futures Contracts would exceed
50% of the value
of the Fund's total assets. Moreover, the Fund will not
purchase put and call
options if as a result more than 5% of its total assets would
be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash or
securities will
be deposited in a segregated account with the Fund's
custodian so that the
amount so segregated will at all times equal the value of the
Futures Contract,
thereby insuring that the use of such futures is unleveraged.
The staff of the SEC has taken the position that purchased
over-the-counter
options and assets used to cover written over-the-counter
options are illiquid
and, therefore, together with other illiquid securities held by
a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling").
Although the
Adviser disagrees with this position, the Adviser intends to
limit the Fund's
writing of over-the-counter options in accordance with the
following procedure.
Except as provided below, the Fund intends to write over-the-
counter options
only with primary U.S. Government securities dealers recognized
as such by the
Federal Reserve Bank of New York. Also, the contracts the Fund has
in place with
such primary dealers provide that the Fund has the absolute right
to repurchase
an option it writes at any time at a price which represents
the fair market
value, as determined in good faith through negotiation between the
parties, but
which in no event will exceed a price determined pursuant to a
formula in the
contract. Although the specific formula may vary between
contracts with
different primary dealers, the formula generally is based on a
multiple of the
premium received by the Fund for writing the option, plus the
amount, if any of
the option's intrinsic value (i.e., the amount that the option is
in-the-money).
The formula may also include a factor to account for the
difference between the
price of the security and the strike price of the option if
the option is
written out-of-the-money. The Fund will treat all or a portion of
the formula as
illiquid for purposes of the SEC illiquidity ceiling test
imposed by the SEC
staff. The Fund may also write over-the-counter options
with non-primary
dealers, including foreign dealers (where applicable), and will
treat the assets
used to cover these options as illiquid for purposes of such
SEC illiquidity
ceiling test.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be
changed without
the approval of the holders of a majority of the Fund's shares
(which, as used
in this Statement of Additional Information, means the lesser of
(i) more than
50% of the outstanding shares of the Trust or a series or class,
as applicable,
or (ii) 67% or more of the outstanding shares of the Trust or a
series or class,
as applicable, present at a meeting if holders of more
than 50% of the
outstanding shares of the Trust or a series or class, as
applicable, are
represented in person or by proxy). Except for Investment
Restriction (1), these
investment restrictions and policies are adhered to at the time
of purchase or
utilization of assets; a subsequent change in circumstances
will not be
considered to result in a violation of policy.
The Fund may not:
(1) Borrow money or pledge, mortgage or hypothecate its
assets, except
as a temporary measure for extraordinary or emergency
purposes or for a
repurchase of its shares or except as contemplated by clause
(8) below, and
in no event shall the Fund borrow in excess of 1/3 of its
assets (the Fund
intends to borrow money only from banks, 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 collateral arrangements with respect
to initial and
variation margin are not considered a pledge of assets).
(2) Purchase any security or evidence 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
except that the
Fund may make deposits on margin in connection with
options, Futures
Contracts, Options on Futures Contracts, Forward Contracts
and options on
foreign currencies.
(3) 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.
(4) Purchase or sell real estate (including limited
partnership
interests but excluding securities secured by real estate
or interests
therein), interests in oil, gas or mineral leases,
commodities or commodity
contracts (except currencies, currency options or
futures, Forward
Contracts or Futures Contracts) in the ordinary course of
the business of
Fund (the Fund reserves the freedom of action to hold
and to sell real
estate acquired as a result of the ownership of securities).
(5) Purchase securities of any issuer if such
purchase at the time
thereof would cause more than 10% of the voting securities
of such issuer
to be held by the Fund.
(6) 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
purpose of this
restriction, collateral arrangements with respect to
options, Futures
Contracts and Options on Futures Contracts. Forward
Contracts and options
on foreign currencies and collateral arrangements with
respect to initial
and variation margin are not deemed to be the issuance
of a senior
security).
(7) Make loans to other persons except through the
lending of its
portfolio securities not in excess of 30% of its total
assets (taken at
market value) and except through the use of repurchase
agreements, the
purchase of commercial paper or the purchase of all or a
portion of an
issue of debt securities in accordance with its
investment objective,
policies and restrictions.
(8) Make short sales of securities or maintain a short
position, unless
at all times when a short position is open it owns an equal
amount of such
securities or securities convertible into or exchangeable,
without payment
of any further consideration, for securities of the same
issue as, and
equal in amount to, the securities sold short ("short
sales against the
box"), and unless not more than 10% of the Fund's net
assets (taken at
market value) is held as collateral for such sales at any
one time (it is
the Fund's present intention to make such sales only for
the purpose of
deferring realization of gain or loss for Federal income tax
purposes; such
sales would not be made of securities subject to outstanding
options).
(9) Invest 25% or more of its total assets in the
securities of any one
issuer (other than U.S. Government securities) or industry.
OTHER OPERATING POLICIES
As a non-fundamental policy, the Fund will not knowingly invest
in securities
which are subject to legal or contractual restrictions on
resale (other than
repurchase agreements), unless the Board of Trustees of the Fund
has determined
that such securities are liquid based upon trading markets
for the specific
security, if, as a result thereof, more than 15% of such
Fund's net assets
(taken at market value) would be so invested.
The Fund will not invest more than 5% of its total assets in
companies which,
including their respective predecessors, have a record of less
than three years"
continuous operation.
In order to comply with certain state statutes, the Fund will
not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio
securities if
the percentage of securities so pledged, mortgaged or
hypothecated would exceed
33 1/3%.
The Fund may not 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 ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
[SERIES]
[NUMBER]
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] NOV-30-1994
[PERIOD-END] NOV-30-1994
[INVESTMENTS-AT-COST] 32,561,675
[INVESTMENTS-AT-VALUE] 30,421,290
[RECEIVABLES] 2,278,443
[ASSETS-OTHER] 5,719
[OTHER-ITEMS-ASSETS] 20,962
[TOTAL-ASSETS] 32,726,414
[PAYABLE-FOR-SECURITIES] 66,000
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 243,515
[TOTAL-LIABILITIES] 309,515
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 35,736,594
[SHARES-COMMON-STOCK] 5,059,216
[SHARES-COMMON-PRIOR] 3,809,526
[ACCUMULATED-NII-CURRENT] (22,892)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1,156,418)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (2,140,385)
[NET-ASSETS] 32,416,899
[DIVIDEND-INCOME] 460,009
[INTEREST-INCOME] 114,280
[OTHER-INCOME] 0
[EXPENSES-NET] 831,306
[NET-INVESTMENT-INCOME] (257,017)
[REALIZED-GAINS-CURRENT] (982,244)
[APPREC-INCREASE-CURRENT] (4,815,973)
[NET-CHANGE-FROM-OPS] 6,055,234
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] (199,908)
[DISTRIBUTIONS-OTHER] (59,378)
[NUMBER-OF-SHARES-SOLD] 8,675,307
[NUMBER-OF-SHARES-REDEEMED] (7,456,173)
[SHARES-REINVESTED] 30,556
[NET-CHANGE-IN-ASSETS] 6,438,721
[ACCUMULATED-NII-PRIOR] 17,000
[ACCUMULATED-GAINS-PRIOR] 86,870
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 261,445
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 975,302
[AVERAGE-NET-ASSETS] 34,859,333
[PER-SHARE-NAV-BEGIN] 6.53
[PER-SHARE-NII] (0.06)
[PER-SHARE-GAIN-APPREC] (0.73)
[PER-SHARE-DIVIDEND] 0.00
[PER-SHARE-DISTRIBUTIONS] (0.05)
[RETURNS-OF-CAPITAL] (0.01)
[PER-SHARE-NAV-END] 5.68
[EXPENSE-RATIO] 2.49
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
[DESCRIPTION] COVER LETTER
MFS
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 BOYLSTON STREET * BOSTON * MASSACHUSETTS *
MASSACHUSETTS 02116-3741
617 * 954-5000
Securities and Exchange Commission
February 27, 1995
Page 2
March 29, 1995
VIA EDGAR
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: MFS SERIES TRUST II (THE "TRUST"), (FILE NOS.
33-7637 AND
811-4775); POST-EFFECTIVE AMENDMENT NO. 16 TO
THE
REGISTRATION
STATEMENT ON FORM N-1A
Ladies and Gentlemen:
Enclosed herewith for filing on behalf of the Trust,
pursuant to (1)
the Securities Act of 1933, as amended (the "1933 Act"),
and Rule 485(b)
thereunder, and (2) the Investment Company Act of 1940, as
amended, please find
Post-Effective Amendment No. 16 to the Registration Statement of
the Trust (the
"Amendment"), marked to indicate changes from Post-Effective
Amendment No. 15
(filed with the Securities and Exchange Commission on January
28, 1994) to the
above-captioned Registration Statement, except in the case of the
Prospectus and
Statement of Additional Information ("SAI") for the MFS Emerging
Growth Fund,
MFS Capital Growth Fund, MFS Gold & Natural Resources Fund and
MFS Intermediate
Income Fund, respectively, which have been marked to show all
changes from the
respective Prospectuses and SAIs dated April 1, 1994.
The Amendment is being filed for the purpose of
updating each Fund's
financial information and making certain other minor and
conforming changes.
Each Fund's Prospectus, SAI and the Trust's Part C
have been updated
with information regarding each Fund's officers, Trustees and
the clients of
each Fund's investment adviser.
In accordance with Rule 485(b)(4), we hereby
represent that the
Amendment does not contain disclosures which would render it
ineligible to
become effective pursuant to Rule 485(b).
If you have any questions concerning the foregoing,
please call the
undersigned or Laurie E. Buckley at (800) 343-2829 or collect at
(617) 954-5000.
Sincerely,
ELIZABETH G.
ARMSTRONG
Elizabeth G.
Armstrong
Associate
Counsel
EGA/bjn
Enclosures
</TABLE>
