<PAGE>
As filed with the Securities and Exchange Commission on March 28, 1996
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. 18
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 20
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 29, 1996 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice on behalf of all of its series
for its fiscal year ended November 30, 1995 on January 25, 1996.
- --------------------------------------------------------------------------------
<PAGE>
MFS SERIES TRUST II
MFS(R) EMERGING GROWTH FUND
MFS(R) CAPITAL GROWTH FUND
MFS(R) GOLD & NATURAL RESOURCES FUND
MFS(R) INTERMEDIATE INCOME FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement
of Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------
<S> <C> <C>
1 (a),(b) Front Cover Page *
2 (a) Expense Summary *
(b),(c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares of the *
the Fund - Performance Information
(d) Condensed Financial Information *
4 (a) Front Cover Page; the Fund; Investment *
Objective and Policies
(b),(c) Investment Objective and Policies *
5 (a) The Fund; Management of the Fund - *
Investment Adviser
<PAGE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------
(b) Front Cover Page; Management of the *
Fund - Investment Adviser; Back
Cover Page
(c) Management of the Fund - Investment *
Adviser
(d) Management of the Fund - Investment *
Adviser - Back Cover Page
(e) Management of the Fund - Back *
Cover Page
(f) Expense Summary *
(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
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------
(g) Information Concerning Shares of the *
Fund - Tax Status; Information
Concerning Shares of the Fund -
Distributions
(h) * *
7 (a) Front Cover Page; Management of the *
Fund - Distributor; Back Cover
Page
(b) Information Concerning Shares of the *
Fund - Purchases; 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; Shareholder Services
(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; Shareholder Services
(b),(c),(d) Information Concerning Shares of the *
Fund - Redemptions and Repurchases
9 * *
<PAGE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------
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 Shares of Distribution Plans
the Fund - Distribution Plans
<PAGE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a),(b),(c) * Portfolio Transactions and
(d),(e) Brokerage Commissions
18 (a) Information Concerning Shares of Description of Shares, Voting
the Fund - Description of Rights and Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shares of Shareholder Services
the Fund - Purchases
(b) Information Concerning Shares of Determination of Net Asset
the Fund - Net Asset Value; Value and Performance -
Information Concerning Shares of Net Asset Value
the Fund - Purchases
(c) * *
20 * Tax Status
21 (a),(b) * Management of the Fund -
Distributor; Distribution
Plans
(c) * *
22 (a) * *
<PAGE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ -----------
(b) * Determination of Net Asset
Value and Performance
23 * Independent Auditors and
Financial Statements
- --------------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE>
PROSPECTUS
April 1, 1996
MFS(R) EMERGING Class A Shares of Beneficial Interest
GROWTH FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- -------------------------------------------------------------------------------
Page
----
1. Expense Summary ....................................................... 2
2. The Fund .............................................................. 3
3. Condensed Financial Information ....................................... 4
4. Investment Objective and Policies ..................................... 5
5. Investment Techniques ................................................. 6
6. Additional Risk Factors ............................................... 10
7. Management of the Fund ................................................ 13
8. Information Concerning Shares of the Fund ............................. 14
Purchases .......................................................... 14
Exchanges .......................................................... 17
Redemptions and Repurchases ........................................ 18
Distribution Plans ................................................. 20
Distributions ...................................................... 22
Tax Status ......................................................... 22
Net Asset Value .................................................... 23
Description of Shares, Voting Rights and Liabilities ............... 23
Performance Information ............................................ 24
9. Shareholder Services .................................................. 24
Appendix A ............................................................ A-1
Appendix B ............................................................ B-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS EMERGING GROWTH FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS Emerging Growth Fund (the "Fund"), a diversified
series of MFS Series Trust II (the "Trust"), an open-end management investment
company consisting of four series. The Fund's investment objective is to provide
long-term growth of capital by investing primarily in common stocks of companies
that MFS believes are early in their life cycle but which have the potential to
become major enterprises (emerging growth companies). THE FUND IS INTENDED FOR
INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT THE RISKS ENTAILED IN SEEKING
LONG-TERM GROWTH OF CAPITAL (see "Investment Objective and Policies"). The
minimum initial investment generally is $1,000 per account (see "Information
Concerning Shares of the Fund -- Purchases"). The Fund's investment adviser and
distributor are Massachusetts Financial Services Company ("MFS" or the
"Adviser") and MFS Fund Distributors, Inc. ("MFD"), respectively, both of which
are located at 500 Boylston Street, Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES. This
Prospectus sets forth concisely the information concerning the Trust and 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 (the "SAI"), dated April 1, 1996, as amended
or supplemented from time to time, which contains more detailed information
about the Trust and the Fund. The SAI is incorporated into this Prospectus by
reference. See page 26 for a further description of the information set forth in
the SAI. A copy of the SAI may be obtained without charge by contacting the
Shareholder Servicing Agent (see back cover for address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
<TABLE>
<CAPTION>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price) ...................... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as applicable) .. See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ................................................... 0.75% 0.75% 0.75%
Rule 12b-1 Fees ................................................... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses(5) ................................................. 0.28% 0.33% 0.28%(4)
Total Operating Expenses .......................................... 1.28% 2.08% 2.03%
<FN>
- ----------
(1) 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 "Information Concerning Shares of the Fund -- Purchases" below).
(2) 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. Payment of the 0.10% per annum Class A distribution fee will commence on such date as the Trustees
of the Trust may determine. Assets attributable to Class A shares sold prior to March 1, 1991 are subject to a
service fee of 0.15% per annum (see Information Concerning Shares of the Fund -- "Distribution Plans" below).
Distribution expenses paid under this Plan, together with the initial sales charge, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible if imposed entirely as an initial sales
charge.
(3) The Fund has adopted separate Distribution Plans for its Class B and Class C 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 under the Class B Distribution Plan and the Class C Shares
under the Class C Distribution Plan (see "Distribution Plans"). Distribution expenses paid under these Plans,
together with any CDSC payable upon redemption of Class B and Class C shares, may cause long-term shareholders to
pay more than the maximum sales charge that would have been permissible if imposed entirely as an initial sales
charge.
(4) Based on Class A expenses during the last fiscal year except for the shareholder servicing agent fees component of
"Other Expenses" which has been estimated for Class C shares.
(5) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent, and may enter into other such arrangements
and directed brokerage arrangements (which would also have the effect of reducing the Fund's expenses). Any such fee
reductions are not reflected under "Other Expenses."
</FN>
<CAPTION>
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 CLASS C
------ ------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
(1) (3)
1 year .................................. $ 70 $ 61 $ 21 $ 31 $ 21(1)
3 years ................................. 96 95 65 64 64
5 years ................................. 124 132 112
10 years ................................. 203 221(2) 221(2)
<FN>
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after purchase; therefore, years nine and ten
reflect Class A expenses.
(3) Purchases which are redeemed within 12 months of purchase are subject to a 1% CDSC.
</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.
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 objectives and policies. Shares of the Fund are continuously sold to
the public and the Fund then uses the proceeds to buy securities for its
portfolio. Three classes of shares of the Fund currently are offered to the
general public. Class A shares are offered at net asset value plus an initial
sales charge up to a maximum of 5.75% of the offering price (or a CDSC upon
redemption of 1.00% during the first year in the case of certain purchases of $1
million or more and certain purchases by retirement plans) and are subject to an
annual distribution fee and service fee up to a maximum of 0.35% per annum.
Class B shares are offered at net asset value without an initial sales charge
but are subject to a CDSC upon redemption (declining from 4.00% during the first
year to 0% after six years) and an annual distribution fee and a service fee up
to a maximum of 1.00% per annum; Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge but are subject to a CDSC upon
redemption of 1.00% during the first year and an annual distribution fee and
service fee up to a maximum of 1.00% per annum. Class C shares do not convert to
any other class of shares of the Fund.
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.
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors given upon their authority, as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Class A and Class B shares
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1995 1994 1993** 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of period $18.73 $17.68 $16.43 $18.57 $17.64 $14.93
Income from investment operations# --
Net investment loss ........................................ $(0.23) $(0.20) $(0.03) $(0.41) $(0.35) $(0.33)
Net realized and unrealized gain on investments ........... 8.68 1.78 1.28 8.65 1.78 3.19
------ ------ ------ ------- ------ ------
Total from investment operations ......................... $ 8.45 $ 1.58 $ 1.25 $ 8.24 $ 1.43 $ 2.86
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net realized gain on investments ...................... $(0.38) $(0.53) $ -- $(0.24) $(0.50) $(0.15)
In excess of net realized gain on investments .............. -- *** -- -- -- *** -- --
Tax return of capital ............ (0.01) -- -- (0.01) -- --
Total distributions declared to shareholders ............. $(0.39) $(0.53) -- $(0.25) $(0.50) $(0.15)
------ ------ ------ ------ ------
Net asset value -- end of period ............................. $26.79 $18.73 $17.68 $26.56 $18.57 $17.64
------ ------ ------ ------ ------ ------
Total return++ ............................................... 45.98% 9.06% 38.98%+ 44.89% 8.21% 19.36%
RATIOS (TO AVERAGE DAILY NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ................................................. 1.28% 1.33% 1.19%+ 2.08% 2.14% 2.19%
Net investment loss ........................................ (1.04)% (1.09)% (0.98)%+ (1.83)% (1.90)% (1.61)%
PORTFOLIO TURNOVER 20% 39% 58% 20% 39% 58%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ................ $1,312 $ 470 $ 371 $2,001 $ 769 $602
<FN>
- ----------
**For the period from the date of issue of Class A shares, September 13, 1993 to November 30, 1993.
***The per share distribution in excess of net realized gain on investments was $0.0049 and $0.0031 per share for Class A
and Class B shares, respectively.
+Annualized.
#Per share data for the periods subsequent to December 1, 1993 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
(S)The 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 net investment loss per share and ratios would have been:
Net investment loss ...................................... $(0.25) $(0.22) -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses## ............................................. 1.38% 1.43% -- -- -- --
Net investment loss .................................... (1.14)% (1.19)% -- -- -- --
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Class B shares
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1992 1991 1990 1989 1988 1987*
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .................... $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97 $ 5.50
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment loss ..................................... $(0.07) $(0.13) $(0.14) $(0.13) $(0.11) $(0.06)
Net realized and unrealized gain (loss) on investments .. 3.52 5.31 (0.66) 1.91 1.05 (0.47)
------ ------ ------ ------ ------ ------
Total from investment operations ...................... $ 3.45 $ 5.18 $(0.80) $ 1.78 $ 0.94 $(0.53)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments ............................ $(0.59) $ -- $ -- $ -- $ -- $ --
------ ------ ------ ------ ------ ------
Net asset value -- end of period .......................... $14.93 $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97
====== ====== ====== ====== ====== ======
Total return .............................................. 29.25% 75.18% (10.40)% 30.12% 18.91% (10.44)%+
RATIOS (TO AVERAGE DAILY NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ................................................ 2.33% 2.50% 2.75% 2.81% 2.30% 2.40%+
Net investment loss ..................................... (2.00)% (1.98)% (1.86)% (1.91)% (1.65)% (1.50)%+
PORTFOLIO TURNOVER ........................................ 59% 112% 86% 95% 57% 81%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ............. $357 $145 $73 $82 $61 $50
<FN>
- ----------
*For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
+Annualized.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- 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.
INVESTMENT POLICIES -- The Fund's policy is to invest primarily (i.e., at least
80% of its assets under normal circumstances) in common stocks of companies that
MFS believes 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, technologies, management and market and other opportunities which are
usually necessary to become more widely recognized as growth companies. Emerging
growth companies can be of any size, and the Fund may invest in larger or 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.
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. In addition,
there may be less research available on many promising small and medium sized
emerging growth companies, making it more difficult to find and analyze these
companies. 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.
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 Risk Factors -- Lower-Rated Fixed
Income Securities" below).
Consistent with its investment objective and policies described above, the Fund
may invest up to 25%, and generally expects to invest between 0% and 10% of its
total assets on foreign securities. (see "Additional Risk Factors -- Foreign
Securities"). The Fund may also invest in emerging market securities (see
"Additional Risk Factors -- 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 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.
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.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described more
fully in the SAI. See "Investment Techniques" in the SAI.
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and would be required to be secured continuously by collateral in
cash, U.S. Government securities or an irrevocable letter of credit maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would continue to collect the equivalent of the
interest on the securities loaned and would also receive either interest
(through investment of cash collateral) or a fee (if the collateral is U S.
Government securities or a letter of credit).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures which are intended
to minimize risk.
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 liquid and thus not subject to the Fund's limitation on investing
not more than 15% of its net assets in illiquid investments. The Board of
Trustees has adopted guidelines and delegated to the Adviser the daily function
of determining and monitoring the liquidity of Rule 144A securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. The Board will carefully monitor the Fund's investments in Rule
144A securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of decreasing the level of liquidity in 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 SAI.
INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of unusual market
conditions when the Adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Fund may be invested in cash 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 Appendix B to this Prospectus for a
description of U.S. Government obligations and certain short-term investments.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the SAI for further
information on these securities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in loans and other direct indebtedness. By purchasing a loan, the Fund acquires
some or all of the interest of a bank or other lending institution in a loan to
a corporate 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 loans 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. Loans 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 loans, other direct
indebtedness and the risks related to transactions therein, see the SAI.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
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 -- Foreign Securities" below).
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 SAI, which should be read in conjunction with the following section. In
addition, the SAI contains a further discussion of the nature of the
transactions which may be entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call and put options
and purchase call and put options on securities. The Fund will write options on
securities for the purpose of increasing its return on such securities and/or to
protect the 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.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Investment Techniques" in the SAI.
FIXED INCOME SECURITIES: The net asset value of the shares of an open-end
investment company which may invest to a limited extent in fixed income
securities changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected to
rise. Conversely, when interest rates rise, the value of a fixed income
portfolio can be expected to decline.
LOWER-RATED FIXED INCOME 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 Service ("S&P") or by Fitch
Investors Services, Inc. ("Fitch") or comparable unrated securities (commonly
known as "junk bonds") are considered speculative. For a description of these
and other rating categories, see Appendix B. These lower-rated high yielding
fixed income securities generally tend to reflect economic changes (and the
outlook for economic growth), short-term corporate and industry developments and
the market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates (although these
lower-rated fixed income securities are also affected by changes in interest
rates). In the past, economic downturns or an increase in interest rates have
under certain circumstances caused a higher incidence of default by the issuers
of these securities and may do so in the future, especially in the case of
highly leveraged issuers. During certain periods, the higher yields on the
Fund's lower-rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, the Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. Changes
in the value of securities subsequent to their acquisition will not affect cash
income or yield to maturity to the Fund but will be reflected in the net asset
value of shares of the Fund. The market for these lower-rated fixed income
securities may be less liquid than the market for investment grade fixed income
securities. Furthermore, the liquidity of these lower-rated securities may be
affected by the market's perception of their credit quality. Therefore, the
Adviser's judgment may at times play a greater role in valuing these securities
than in the case of investment grade fixed income securities, and it also may 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.
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
SAI, which could increase the risks incurred by the Fund in entering into such
transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S. exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC") and on
foreign exchanges. The securities underlying options and Futures Contracts
traded by the Fund may include domestic as well as foreign securities. Investors
should recognize that transactions involving foreign securities or foreign
currencies, and transactions entered into in foreign countries, may involve
considerations and risks not typically associated with investing in U.S.
markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
For example, the Fund may sell Futures Contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the Futures
transaction will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction. The risks
related to transactions in options, Futures Contracts, Options on Futures
Contracts and Forward Contracts entered into by the Fund are set forth in
greater detail in the SAI, which should be reviewed in conjunction with the
foregoing discussion.
FOREIGN SECURITIES: Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. These include changes in currency rates, exchange control
regulations, 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 SAI for further
discussion of foreign securities and the holding of foreign currency, as well as
the associated risk.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or if the Fund has entered into a contract
to sell the security, in possible liability to the purchaser. Certain markets
may require payment for securities before delivery and in such markets the Fund
bears the risk that the securities will not be delivered and that the Fund's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
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.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
PORTFOLIO TRADING
The Fund intends to manage its portfolio by buying and selling securities 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 SAI.)
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD") and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of other investment company clients
of MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions. From time to time, the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to
pay a portion of the Fund's operating expenses (e.g., fees charged by the
custodian of the Fund's assets). For a further discussion of portfolio
trading, see the SAI.
--------------------
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated August 1, 1993, as amended (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. 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 as a portfolio manager by the
Adviser since 1984. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. Effective July 1, 1995, for its
services and facilities, the Adviser receives a management fee, computed and
paid monthly, in an amount equal to 0.75% of the first $2.5 billion of the
Fund's average daily net assets and 0.70% of the amount of average daily net
assets in excess of $2.5 billion, in each case on an annualized basis for its
then-current fiscal year.
For the Fund's fiscal year ended November 30, 1995, the Adviser received
management fees under the Fund's Advisory Agreement of $15,957,197.
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 various 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 $43.9 billion on behalf of approximately 1.9 million investor
accounts as of February 29, 1996. As of such date, the MFS organization managed
approximately $20 billion of assets invested in equity securities and
approximately $20 billion of assets invested in fixed income securities.
Approximately $3.8 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott,
John D. McNeil and 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.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS will have access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial will have
access to the extensive U.S. equity investment expertise of MFS. One or more MFS
investment analysts are expected to work for an extended period with Foreign &
Colonial's portfolio managers and investment analysts at their offices in
London. In return, one or more Foreign & Colonial employees are expected to work
in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer and other financial institutions ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
The Fund offers three classes of shares (Class A, B and C shares) which bear
sales charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
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 3.05 2.25
$500,000 but less than $1,000,000 .......................................... 2.20 2.25 1.70
$1,000,000 or more ......................................................... None** None** See Below**
<FN>
- ----------
*Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated using
the percentages above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In
the following two circumstances, Class A shares are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates 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.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
---------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
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%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee payable under the Fund's Class B Distribution Plan (see
"Distribution Plans" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of Class
B shares is 4% of the purchase price of the shares (commission rate of 3.75%
plus a service fee equal to 0.25% of the purchase price).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus.
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. See "Distribution Plans" below. However, for purposes of
conversion to Class A shares, all shares in a shareholder's account that were
purchased through the reinvestment of dividends and distributions paid in
respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bears to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is $1,000,000 per
transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions. In
certain circumstances, the CDSC imposed upon redemption of Class C shares is
waived. These circumstances are described in Appendix A to this Prospectus. See
"Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plans"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code") if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject 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 shares 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.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RETIREMENT PLAN ACCOUNTS. Following the termination of any agreement between
a plan sponsor and the Shareholder Servicing Agent or its affiliates with
respect to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent, the Shareholder
Servicing Agent shall combine all plan participant accounts into a single
omnibus or pooled account for each Fund in which the plan invests.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale).
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between of Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth in this
paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
New York Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"),
the exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers. 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 -- General -- Right to Reject
Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225- 2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
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.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C shares and Class B shares purchased on or after January 1, 1993
will be aggregated on a calendar month basis -- all transactions made during a
calendar month, regardless of when during the month they have occurred, will age
one year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of the Fund purchased
prior to January 1, 1993, transactions will be aggregated on a calendar year
basis -- all transactions made during a calendar year, regardless of when during
the year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year. Prior to April 1, 1996, Class
C shares of the MFS Funds were not subject to a CDSC upon redemption. In no
event will Class C shares of the MFS Funds purchased prior to this date be
subject to a CDSC. For the purpose of calculating the CDSC upon redemption of
shares acquired in an exchange on or after April 1, 1996, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares (if such original purchase occurred
prior to April 1, 1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C Shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. Subject to 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
securities (instead of cash) from the Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plans"), after having concluded that there is a
reasonable likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below have not yet been imposed or
are being waived. These circumstances are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under each Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the separate Distribution Plans. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expense incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The Distribution Plans have substantially identical provisions with respect to
their operating policies and their initial approval, renewal, amendment and
termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant to
an initial sales charge, a substantial portion of which is paid to or retained
by the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets attributable
to Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more of Class A shares which are sold at net asset value but
which are subject to a 1% CDSC for one year after purchase). Distribution fee
payments under the Class A Distribution Plans may be used by MFD to pay
securities dealers a distribution fee in an amount equal on an annual basis to
0.25% per annum of each Fund's average daily net assets attributable to Class A
shares (other than Class A shares that have converted from Class B shares) owned
by investors for whom that securities dealer is the holder or dealer of record.
See "Purchases -- Class A Shares" above. In addition, to the extent that the
aggregate service and distribution fees paid under the Class A Distribution Plan
do not exceed 0.35% per annum of the average daily net assets of the Fund
attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution- related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class B
Shares" above. MFD will advance to dealers the first year service fee described
above at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefore, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to such
shares commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C DISTRIBUTION PLAN. Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class C
shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Class C Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Class C Distribution Plan equal, on an annual basis, to
0.75% of the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.25%,
1.00% and 1.00% per annum, respectively. Payment of the 0.10% per annum Class A
distribution fee will commence on such date as the Trustees of the Trust may
determine. Assets attributable to Class A shares sold prior to March 1, 1991 are
subject to a service fee of 0.15% per annum.
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 and Class C shares because expenses attributable to
Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986 as amended (the "Code"), 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. Shortly after the end of each calendar year, each Fund shareholder
will receive a statement setting forth the federal income tax status of all
dividends and distributions for that year, including the portion taxable as
ordinary income, the portion taxable as long-term capital gain, the portion, if
any, representing a return of capital (which is free of current taxes but
results in a basis reduction) and the amount, if any, of federal income tax
withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and certain other payments that are subject to such withholding and
are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments that have been subject to 30%
withholding. 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 SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value of each class of
shares is effective for orders received by the dealer prior to its calculation
and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES The Fund, one of four
series of the Trust, has three classes of shares, entitled Class A, Class B and
Class C Shares of Beneficial Interest (without par value). The Trust has
reserved the right to create and issue additional classes and series of shares,
in which case 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 SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above 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 will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher. The Fund's total rate of return quotations
are based on historical performance and are not intended to indicate future
performance. Total rate of return reflects all components of investment return
over a stated period of time. The Fund's quotations may from time to time be
used in advertisements, shareholder reports or other communications to
shareholders. For a discussion of the manner in which the Fund will calculate
its total rate of return, see the SAI. For further information about the Fund's
performance for the fiscal year ended November 30, 1995, please see the Fund's
Annual Report. A copy of the Annual Report may be obtained without charge by
contacting the Shareholder Servicing Agent (see back cover for address and phone
number). In addition to information provided in shareholder reports, the Fund
may, in its discretion, from time to time, make a list of all or a portion of
its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
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 SAI) 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 (a bank collective investment fund) within a 13-month period
(or 36-month period for purchases of $1 million or more), the shareholder may
obtain such shares at the same reduced sales charge as though the total quantity
were invested in one lump sum, subject to escrow agreements and the appointment
of an attorney for redemptions from the escrow amount if the intended purchases
are not completed, by completing the Letter of Intent section of the Account
Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan ("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP will not be subject to a CDSC and are generally limited to 10% of the value
of the account at the time of the establishment of the SWP. The CDSC will not be
waived in the case of SWP redemptions of Class A shares which are subject to a
CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account 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 if such fund is available for
sale. 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 SAI for further information concerning the Automatic Exchange
Plan. Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans
and other corporate pension and profit-sharing plans. Investors should consult
with their tax adviser before establishing any of the tax-deferred retirement
plans described above.
----------------
The Fund's SAI, dated April 1, 1996, 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) 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
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares is waived (Section II), and
the CDSC for Class B and Class C shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B and Class C shares, as
applicable, is waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life Assurance Company of Canada ("Sun Life")
or any of their subsidiary companies;
* Trustees and retired trustees of any investment company for which
MFD serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
* Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of Plan participant;
* Loan from Plan (repayment of loans, however, will constitute new sales
for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section 1.401
(k)-1(d)(2), as amended from time to time);
* Termination of employment of Plan participant (excluding, however, a
partial or other termination of the Plan);
* Tax-free return of excess Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent; and
* Distributions from a Plan that has invested its assets in one or more
of the MFS Funds for more than 10 years from the later to occur of:
(i) January 1, 1993 or (ii) the date such Plan first invests its
assets in one or more of the MFS Funds. The sales charges will be
waived in the case of a redemption of all of the Plan's shares in all
MFS Funds (i.e., all the assets of the Plan invested in the MFS Funds
are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the Plan's assets in
the MFS Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares is waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the Plan participant,
as applicable, has attained the age of 70 1/2 years old, but only with
respect to the minimum distribution under applicable Internal Revenue
Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. It should be emphasized, however, that ratings are
not absolute standards of quality. Consequently, debt instruments with the same
maturity, coupon and rating may have different yields while debt instruments of
the same maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: --Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term 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 SERVICE
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>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA02110
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) EMERGING GROWTH FUND
500 Boylston Street
Boston, MA 02116
MEG-1-4/96/787M 7/207
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) EMERGING GROWTH FUND
Prospectus
April 1, 1996
<PAGE>
MFS(R) EMERGING STATEMENT OF
GROWTH FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) April 1, 1996
- ------------------------------------------------------------------------------
Page
----
1. Definitions .................................................. 2
2. Investment Techniques ........................................ 2
3. Investment Restrictions ...................................... 11
4. Management of the Fund ....................................... 12
Trustees ................................................... 13
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 Auditors and Financial Statements ................ 23
Appendix A ................................................... 24
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"), as amended or
supplemented from time to time, sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus, dated April 1, 1996. 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 of the Fund, dated April 1, 1996,
as amended or supplemented from time to time.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment techniques 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, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will usually not exceed five days). During the existence of a
loan, the Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation based on investment of cash collateral or a fee. The Fund would
not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of
an important vote to be taken among holders of the securities or of the giving
or withholding of their consent on a material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing, and when, in the judgment of the Adviser, the consideration
which could be earned currently from securities loans of this type justifies
the attendant risk. If the Adviser determines to make securities loans, it is
not intended that the value of the securities loaned would exceed 20% of the
value of the Fund's total assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have cash, short-term money market instruments or high
quality debt securities sufficient to cover any commitments or to limit any
potential risk. However, although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to 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.
LOANS AND OTHER DIRECT INDEBTEDNESS
As described in the Prospectus, the Fund may purchase loans and other direct
indebtedness. In purchasing a loan, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
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 loans 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 loans and other direct
indebtedness which the Fund will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower.
As the Fund may be required to rely upon another lending institution to
collect and pass 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
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. 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, loans 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 ("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. Under the
terms of most sponsored arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depository of an unsponsored ADR, on
the other hand, is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass
through voting rights to ADR holders in respect of the deposited securities.
The Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the use
of the depository receipts in the 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
Commodities Futures Trading Commission ("CFTC") and the performance guarantee
of the exchange clearinghouse. In addition, Options on Futures Contracts may
be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract
and in the same principal amount as the call written where the exercise price
of the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or securities in a segregated
account with its custodian. The Fund may cover the writing of put Options on
Futures Contracts (a) through sales of the underlying Futures Contract, (b)
through segregation of cash, short-term money market instruments or high
quality debt securities in an amount equal to the value of the security or
index underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
is less than the exercise price of the put written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. Put and
call Options on Futures Contracts may also be covered in such other manner as
may be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Upon the exercise of a call Option
on a Futures Contract written by the Fund, the Fund will be required to sell
the underlying Futures Contract which, if the Fund has covered its obligation
through the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by the
Fund is exercised, the Fund will be required to purchase the underlying
Futures Contract which, if the Fund has covered its obligation through the
sale of such Contract, will close out its futures position.
The writing of a call Option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing
of a put Option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and the changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline or changes in interest or
exchange rates, the Fund could, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease occurs, it may be offset,
in whole or part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Fund could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward foreign currency
exchange contracts ("Forward Contracts") for hedging and non-hedging purposes.
Forward Contracts may be used for hedging to attempt to minimize the risk to
the Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies. The Fund intends to enter into Forward Contracts for
hedging purposes. 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 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 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 leveraging effect of such Futures Contract
is minimized.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following
procedure. Except as provided below, the Fund intends to write over-the-
counter options only with primary U.S. Government securities dealers
recognized as such by the Federal Reserve Bank of New York. Also, the
contracts the Fund has in place with such primary dealers provide that the
Fund has the absolute right to repurchase an option it writes at any time at a
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
generally is based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
the-money. The Fund will treat all or a portion of the formula as illiquid for
purposes of the SEC illiquidity ceiling test imposed by the SEC staff. The
Fund may also write over-the-counter options with non-primary dealers,
including foreign dealers (where applicable), and will treat the assets used
to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
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 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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN
Private Investor.
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer, Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April 1992); Society
National Bank (commercial bank), Director (prior to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
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
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
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*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston
Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended together with such Trustee's out-of-pocket
expenses. The Trust has adopted a retirement plan for non-interested Trustees
and Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 75
and if the Trustee has completed at least five years of service, he would be
entitled to annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 75
and receive reduced payments if he has completed at least five years of
service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Trust for
Messrs. Brodkin, Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current years service and amortize
past service cost.
As of February 29, 1996, the Trustees and officers, as a group, owned less
than 1% of the outstanding shares of the Fund. As of February 29, 1996,
Merrill Lynch, Pierce, Fenner & Smith Inc., P.O. Box 45286, Jacksonville, FL
32232-5286 was the record owner of approximately 13.49% of the outstanding
Class B shares of the Fund.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable under the retirement plan. The Declaration of Trust provides that the
Trust will indemnify its Trustees and officers against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with the Trust, unless, as to liabilities to the
Trust or its shareholders, it is finally adjudicated that they engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices, or with respect to any matter, unless it is
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interest of the Trust. In the case of
settlement, such indemnification will not be provided unless it has been
determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence
or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management
dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which 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, as amended (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 first $2.5 billion of the Fund's average
daily net assets and 0.70% of the amount of average daily net assets in excess
of $2.5 billion, in each case on an annualized basis for its then current
fiscal year.
For the Fund's fiscal year ended November 30, 1993, the Fund's current
investment adviser, MFS, together with Lifetime Advisers, Inc., a wholly owned
subsidiary of MFS, 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. For
the Fund's fiscal year ended November 30, 1995, MFS received $15,957,197 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,
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 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 Custodian also serves as the dividend and
distribution disbursing agent of the Fund. The Custodian has contracted with
the Adviser for the Adviser to perform certain accounting functions related to
options transactions for which the Adviser receives remuneration on a cost
basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Trust, dated as of September
10, 1986 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the
Fund. For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
of assets attributable to Class A, Class B and Class C shares, respectively.
In addition, the Shareholder Servicing Agent will be reimbursed by the Fund
for certain expenses incurred by the Shareholder Servicing Agent on behalf of
the Fund. 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 SAI). A group might
qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain 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. During the fiscal year ended November 30, 1995, MFD received
sales charges of $1,055,053 and dealers received sales charges of $9,137,371
(as their concession on gross sales charges of $10,192,424) for selling Class
A shares of the Fund; the Fund received $460,963,288 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, 1995, 1994 and 1993, the Contingent
Deferred Sales Charge ("CDSC") imposed on redemption of Class B shares was
$1,787,150, $1,027,718 and $879,938, respectively.
CLASS C SHARES: MFD acts as agent in selling Class C shares of the Fund to
dealers. The public offering price of Class C shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers
loans from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers
for the purchase of 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 from time to time through such broker-dealers on behalf of
the Fund. The Trust's Trustees (together with the Trustees of the other MFS
Funds) have directed the Adviser to allocate a total of $23,100 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, 1995, total brokerage
commissions of $1,932,499 were paid on transactions (other than U.S.
Government securities, purchased options transactions and short-term
obligations) of $935,882,443. 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.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or MFS or any subsidiary of MFS. Investment decisions for the Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Advisor 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 shares of Class B or Class C of the Fund or any
of the classes of other MFS Funds or MFS Fixed Fund (a bank collective
investment fund) within a 13-month period (or 36-month period 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, based upon the value of his account. Each payment under a Systematic
Withdrawal Plan ("SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP generally are limited to 10% of the value of the
account at the time of the establishment of the SWP. SWP payments are drawn
from the proceeds of share redemptions (which would be a return of principal
and, if reflecting a gain, would be taxable). Redemptions of Class B and Class
C shares will be made in the following order: (i) any "Free Amount"; (ii) to
the extent necessary, any "Reinvested Shares"; and (iii) to the extent
necessary, the "Direct Purchase" subject to the lowest CDSC (as such terms are
defined in "Contingent Deferred Sales Charge" in the Prospectus). The CDSC
will be waived in the case of redemptions of Class B and Class C shares
pursuant to a SWP but will not be waived in the case of SWP redemptions of
Class A shares which are subject to a CDSC. To the extent that redemptions for
such periodic withdrawals exceed dividend income reinvested in the account,
such redemptions will reduce and may eventually exhaust the number of shares
in the shareholder's account. All dividend and capital gain distributions for
an account with a SWP will be received in full and fractional shares of the
Fund at the net asset value in effect at the close of business on the record
date for such distributions. To initiate this service, shares having an
aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, the Shareholder Servicing
Agent. With respect to Class A shares, maintaining a withdrawal plan
concurrently with an investment program would be disadvantageous because of
the sales charges included in share purchases and the imposition of a CDSC on
certain redemptions. The shareholder may deposit into the account additional
shares of the Fund, change the payee or change the amount of each payment. The
Shareholder Servicing Agent may charge the account for services rendered and
expenses incurred beyond those normally assumed by the Fund with respect to
the liquidation of shares. No charge is currently assessed against the
account, but one could be instituted by the Shareholder Servicing Agent on 60
days' notice in writing to the shareholder in the event that the Fund ceases
to assume the cost of these services. The Fund may terminate any SWP for an
account if the value of the account falls below $5,000 as a result of share
redemptions (other than as a result of a SWP) or an exchange of shares of the
Fund for shares of another MFS Fund. Any SWP may be terminated at any time by
either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be
made at any time by mailing a check payable to the Fund directly to the
Shareholder Servicing Agent. The shareholder's account number and the name of
his investment dealer must be included with each in- vestment.
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 (if available for sale) under the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to 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 Class C shares and
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 (the "Code"), 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 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 ordinary income and any distributions
from net short-term capital gains (whether paid in cash or reinvested in
additional shares), are taxable to shareholders as ordinary income for federal
income tax purposes. A portion of the Fund's ordinary income dividends (but
none of its capital gain distributions) is normally eligible for the dividends
received deduction for corporations if the recipient otherwise qualifies for
that deduction with respect to its holding of Fund shares. Availability of the
deduction for particular corporate shareholders is subject to certain
limitations and deducted amounts may be subject to the alternative minimum tax
and may result in certain basis adjustments. Distributions of net capital gain
(i.e., the excess of net long-term capital gains over net short-term capital
losses), whether paid in cash or reinvested in additional shares, are taxable
to 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 of any calendar year,
that are payable to shareholders of record in such a month, and that are paid
the following January will be treated as if received by the shareholders on
December 31 of the year in which they are declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after the
end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Fund held for
six months or less will be treated as long-term capital loss to the extent of
any distributions of net capital gain made with respect to those shares. Any
loss realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their
purchase followed by any purchase without payment of an additional sales
charge (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).
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. 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 taxes on the Fund.
Investment income received by the Fund from foreign securities may be subject
to foreign income taxes; 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 the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends
and other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower 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 at the rate of 31% on taxable dividends and redemption
proceeds paid to any shareholder (including a Non-U.S. Person) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be
applied to payments that have been subject to 30% withholding. Distributions
received from the Fund by Non-U.S. Persons may also be subject to tax under
the laws of their own jurisdictions.
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 and 1% maximum for Class C shares) and therefore may result in a higher
rate of return, (ii) a total rate of return assuming an initial account value
of $1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the sales charge (5.75% maximum) 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, 1995 and for the period from December 29, 1986 (the
Fund's commencement of investment operations) to November 30, 1995 was 40.89%,
33.35% and 20.56%, 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, 1995 and for the period from December 29, 1986 (the
Fund's commencement of investment operations) to November 30, 1995 was 44.89%,
33.48% and 20.56%, 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, 1995
and for the period from commencement of investment operations of Class A
shares on September 13, 1993 through November 30, 1995 was 37.61% and 24.18%,
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, 1995 and for the period from
commencement of investment operations of Class A shares on September 13, 1993
through November 30, 1995 was 45.98% and 27.54%, 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, 1995. It has been assumed that dividend
and capital gain distributions were reinvested in additional shares. Any
performance results or total rate of return quotation provided by the Fund
should not be considered as representative of the performance of the Fund in
the future since the net asset value of shares of the Fund will vary based not
only on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate total rates of return should be considered when
comparing the total rate of return of the Fund to total rates of return
published for other investment companies or other investment vehicles. Total
rate of return reflects the performance of both principal and income. Current
net asset value and account balance information may be obtained by calling 1-
800-MFS-TALK (637-8255).
MFS EMERGING GROWTH FUND -- CLASS B
-----------------------------------------------------
VALUE OF VALUE OF
INITIAL REINVESTED VALUE OF
$10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ---------- ---------- ------------- ---------- -----
December 31, 1986*....... $ 9,981 $ 0 $ 0 $ 9,981
December 31, 1987........ 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
December 31, 1995........ 48,109 4,228 542 52,879
- ----------
*For the period from the start of business, December 29, 1986, through
December 31, 1986.
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.
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings
or reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to
the following: Money, Fortune, U.S. News and World Report, Kiplinger's
Personal Finance, The Wall Street Journal, Barron's, Investors Business Daily,
Newsweek, Financial World, Financial Planning, Investment Advisor, USA Today,
Pensions and Investments, SmartMoney, Forbes, Global Finance, Registered
Representative, Institutional Investor, the Investment Company Institute,
Johnson's Charts, Morningstar, Lipper Analytical Services, Inc., CDA
Wiesenberger, Shearson Lehman and Saloman Bros. Indices, Ibbotson, Business
Week, Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual Funds
You Can Buy by Gordon K. Williamson, Consumer Price Index, and Sanford C.
Bernstein & Co. Fund performance may also be compared to the performance of
other mutual funds tracked by financial or business publications or
periodicals. The Fund may also quote evaluations mentioned in independent
radio or television broadcasts and may use charts and graphs to illustrate the
past performance of various indices such as those mentioned above and
illustrations using hypothetical rates of return to illustrate the effects of
compounding and tax-deferral. The Fund may advertise examples of the effects
of periodic investment plans, including the principle of dollar cost
averaging. In such a program, an investor invests a fixed dollar amount in a
fund at periodic intervals, thereby purchasing fewer shares when prices are
high and more shares when prices are low. While such a strategy does not
assure a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the Fund; the Fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment
and evaluation of credit, interest rate, market and economic risks.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-
end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make
full public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management
firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933 ("Truth in Securities Act" or
"Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity
with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-
yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market-
value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993(R) -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the
first Trust to invest in companies deemed to be union-friendly by an
Advisory Board of senior labor officials, senior managers of companies
with significant labor contracts, academics and other national labor
leaders or experts.
9. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares (the "Distribution Plans") pursuant to Section 12(b) of the
1940 Act and Rule 12b-1 thereunder (the "Rule") after having concluded that
there is a reasonable likelihood that each Distribution Plan would benefit the
Fund and the respective class of shareholders. The Distribution Plans are
designed to promote sales, thereby increasing the net assets of the Fund. Such
an increase may reduce the Fund's expense ratio to the extent 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 Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time);
or (ii) to any insurance company which has entered into an agreement with the
Fund and MFD that permits such insurance company to purchase Class A shares
from the Fund at their net asset value in connection with annuity agreements
issued in connection with the insurance company's separate accounts. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum
amount requirement from time to time. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under any Distribution Plan for which there is no dealer of record or for
which qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended November 30, 1995, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- ------------------ ------------ ------------- -------------
Class A Distribution Plan $ 2,061,286 $ 223,471 $1,837,815
Class B Distribution Plan $13,039,043 $ 9,918,223 $3,120,820
GENERAL: Each of the Distribution Plans 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 vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall
provide the Trustees, and the Trustees shall review, at least quarterly, a
written report of the amounts expended (and purposes therefor) under such
Plan. Each of the Distribution Plans may be terminated at any time by vote of
a majority of the Distribution Plan Qualified Trustees or by vote of the
holders of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions"). All agreements relating to any of the
Distributions Plans entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority
of the Distribution Plan Qualified Trustees. Agreements under any of the
Distribution Plans must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment of any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of the Fund's shares. None
of the Distribution Plans may be amended to increase materially the amount of
permitted distribution expenses without the approval of a majority of the
respective class of the Fund's shares (as defined in "Investment
Restrictions") or may be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans 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
three series, Class A shares and Class B shares, as well as Class C shares for
this series. Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, shareholders of each class are entitled to share pro
rata in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
would participate equally in the earnings, dividends and assets allocable to
that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees in accordance with the provisions of Section 16(c) of the 1940 Act.
No material amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the Trust's shares. Shares have no pre-
emptive or conversion rights (except as described in "Purchases -- Conversion
of Class B Shares" in the Prospectus). Shares are fully paid and non-
assessable. The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders
of two-thirds of the Trust's outstanding shares voting as a single class, or
of the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the affected
series' outstanding shares (as defined in "Investment Restrictions") will be
sufficient. The Trust or any series of the Trust may also be terminated (i)
upon liquidation and distribution of its assets, if approved by the vote of
the 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 AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance with tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
The Portfolio of Investments at November 30, 1995, the Statement of Assets and
Liabilities at November 30, 1995, the Statement of Operations for the year
ended November 30, 1995, the Statement of Changes in Net Assets for each of
the two years in the period ended November 30, 1995, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent auditors, as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,725 $ 685 10 $263,815
A. Keith Brodkin --0-- --0-- N/A --0--
Marshall N. Cohan 4,175 1,700 14 148,624
Dr. Lawrence Cohn 3,725 350 18 135,874
Sir David Gibbons 3,725 1,251 13 135,874
Abby M. O'Neill 3,500 491 10 129,499
Walter E. Robb, III 4,175 1,912 15 148,624
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
J. Dale Sherratt 4,175 395 20 148,624
Ward Smith 4,175 609 13 148,624
<FN>
(1) For fiscal year ended November 30, 1995.
(2) Based on normal retirement age of 75.
(3) Information provided is for calendar year 1995. All Trustees receiving compensation served as Trustees of 36 funds within the
MFS fund complex (having aggregate net assets at December 31, 1995, of approximately $12.5 billion) except Mr. Bailey, who
served as Trustee of 73 funds within the MFS fund complex (having aggregate net assets at December 31, 1995, of approximately
$31.7 billion).
</FN>
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
--------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,150 $473 $ 788 $1,103 $1,575
3,439 516 860 1,203 1,719
3,727 559 932 1,304 1,864
4,016 602 1,004 1,405 2,008
4,304 646 1,076 1,506 2,152
4,593 689 1,148 1,607 2,296
<FN>
(4) 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
State Street Bank and 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 AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
EMERGING
GROWTH
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS
[recycle symbol] Printed on recycled paper.
MEG-13-4/96/500 7/207
<PAGE>
<PAGE>
ANNUAL REPORT FOR
YEAR ENDED
NOVEMBER 30, 1995
[logo] M F S (SM)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) EMERGING GROWTH FUND
Front cover
Photo of computer disks.
<PAGE>
MFS(R) EMERGING GROWTH FUND
<TABLE>
<CAPTION>
<S> <C>
TRUSTEES SECRETARY
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor; ASSISTANT SECRETARY
Former Chairman and Director (until 1991), James R. Bordewick, Jr.*
Massachusetts Financial Services Company; CUSTODIAN
Director, Cambridge Bancorp; Director, State Street Bank and Trust Company
Cambridge Trust Company AUDITORS
Marshall N. Cohan - Private Investor Deloitte & Touche LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac INVESTOR INFORMATION
Surgery, Brigham and Women's Hospital; For MFS stock and bond market outlooks,
Professor of Surgery, Harvard Medical School call toll free: 1-800-637-4458 anytime from
The Hon. Sir J. David Gibbons, KBE - Chief a touch-tone telephone.
Executive Officer, Edmund Gibbons Ltd.; For information on MFS mutual funds, call
Chairman, Bank of N.T. Butterfield & Son Ltd. your financial adviser or, for an information
Abby M. O'Neill - Private Investor; kit, call toll free: 1-800-637-2929 any
Director, Rockefeller Financial Services, Inc. business day from 9 a.m. to 5 p.m. Eastern time
(investment adviser) (or leave a message anytime).
Walter E. Robb, III - President and Treasurer, INVESTOR SERVICE
Benchmark Advisers, Inc. (corporate financial MFS Service Center, Inc.
consultants); President, Benchmark Consulting P.O. Box 2281
Group, Inc. (office services); Trustee, Boston, MA 02107-9906
Landmark Funds (mutual funds) For general information, call toll free:
Arnold D. Scott* - Senior Executive Vice 1-800-225-2606 any business day from
President, Director and Secretary, 8 a.m. to 8 p.m. Eastern time.
Massachusetts Financial Services Company For service to speech- or hearing-impaired,
Jeffrey L. Shames* - President and Director, call toll free: 1-800-637-6576 any business day
Massachusetts Financial Services Company from 9 a.m. to 5 p.m. Eastern time. (To use
J. Dale Sherratt - President, Insight Resources, this service, your phone must be equipped with
Inc. (acquisition planning specialists) a Telecommunications Device for the Deaf.)
Ward Smith - Former Chairman (until 1994), For share prices, account balances and
NACCO Industries; Director, Sundstrand exchanges, call toll free: 1-800-MFS-TALK
Corporation (1-800-637-8255) anytime from a touch-tone
INVESTMENT ADVISER telephone.
Massachusetts Financial Services Company
500 Boylston Street ----------------------------------------------------
Boston, MA 02116-3741 TOP-RATED SERVICE
DISTRIBUTOR DALBAR For the second year in a
MFS Fund Distributors, Inc. row, MFS earned a
500 Boylston Street MFS #1 MFS #1 ranking in
Boston, MA 02116-3741 DALBAR, Inc.'s
PORTFOLIO MANAGER DALBAR Broker/Dealer Survey,
John W. Ballen* Main Office Operations
TREASURER Service Quality category. The firm achieved a 3.49
W. Thomas London* overall score - on a scale of 1 to 4 - in the 1995
ASSISTANT TREASURER survey. A total of 71 firms responded, offering input
James O. Yost* on the quality of service they receive from 36 mutual
fund companies nationwide. The survey contained
*Affiliated with the Investment Adviser questions about service quality in 17 categories,
including "knowledge of phone service contacts,"
"accuracy of transactions processing," and "overall
ease of doing business with the firm."
----------------------------------------------------
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
In January 1994, the Fund was closed to new investors in order to help maximize
the value of existing Fund shares in the investment environment which prevailed
at that time. The Fund was re-opened on January 16, 1995, following a period of
decline in stock prices during which we were able to identify a number of
industries and companies that we felt offered attractive investment
opportunities. For the year ended November 30, 1995, Class A shares of the Fund
provided a total return of 45.98%, while Class B shares had a total return of
44.89%. Both of these returns assume the reinvestment of distributions but
exclude the effects of any sales charges. The Fund's returns compare to the
36.93% return of the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock performance. Over the same period, the
stock market, as measured by the Russell 2000 Total Return Index (an unmanaged
index comprised of 2,000 of the smallest U.S.-domiciled company common stocks
which are traded on the New York Stock Exchange, the American Stock Exchange and
NASDAQ) returned 28.51%. A discussion of the Fund's performance during this
reporting period may be found in the Portfolio Performance and Strategy section
of this letter.
Economic Outlook
Moderate, but sustainable, growth has been the hallmark of the economic
expansion's fifth year. While initial estimates showed the U.S. economy growing
at an annual rate of 4.2% in the third quarter, this surprisingly strong growth
was mainly driven by a pickup in consumer spending and an increase in business
and government outlays. Although impressive, this growth rate is not expected to
continue in coming months. Recent retail sales have been disappointing, in part
because of rising levels of consumer debt. An extended period of lower mortgage
rates seems to have relieved much of the pent-up demand for housing. Growth is
not expected to get much help from the manufacturing sector, either, as order
flows from manufacturers have moderated. Export activity, meanwhile, is also
expected to remain modest as continued weakness abroad has limited demand for
many U.S. goods. However, the Federal Reserve Board's consistent and, so far,
successful efforts to fight inflation seem to be giving consumers and businesses
enough longer term confidence to help maintain modest growth in real (adjusted
for inflation) gross domestic product into 1996.
Stock Market
After some volatility late in the third quarter, the stock market continued to
strengthen. Although many companies reported solid third-quarter results, there
was some weakness in the earnings of retail, financial services and even some
technology companies. However, a slowdown in earnings may be a positive
development if it is an indication that the economy is not overheating and that
inflation is under control. While we see a deceleration of corporate earnings as
the inevitable consequence of traditional business cycles, we remain encouraged
by the high absolute level of profitability among U.S. companies. Also, many
companies' increasing emphasis on cost containment and growing use of technology
have helped keep them highly competitive and reasonably profitable. Looking
ahead, we believe that a stabilizing interest rate environment, coupled with
reasonable earnings reports, could justify current market valuations.
Portfolio Performance and Strategy
The Fund's performance benefited from strong appreciation in the stock prices of
many of its holdings in the technology sector, which responded in 1995 to very
strong earnings growth for semiconductor, hardware, software, networking and
processing companies. Oracle Systems (database software), System Software
(manufacturing application software), and Informix (database software and tools)
reported very strong earnings and their stock prices responded positively.
Sybase (database software) and BMC Software (systems software) became major
additions to the portfolio after they reported disappointing earnings which
drove their stock prices to levels we believed to be very depressed. Both stocks
rebounded strongly and contributed to the positive performance of the Fund.
Other strong performers included networking stocks such as Cabletron and Bay
Networks. The stocks of our semiconductor companies responded very positively to
their strong earnings reports. Compuware (system software) and Autodesk
(computer-aided design) reported disappointing earnings and have been
disappointing stocks. We maintain positions in these companies because we
believe their stock prices will rebound from their currently depressed levels.
The performance of our leisure stocks was particularly helpful. HFS, the
nation's largest franchiser of hotels and real estate companies, saw its stock
price more than double this year, as strong earnings gains and acquisitions such
as Century 21 assured investors of its future growth prospects. We believe HFS
has one of the most astute management teams around, and this position is the
Fund's largest.
Health care stocks had a mixed performance this year. We established major
positions in this sector to take advantage of what we believed to be depressed
prices caused by investor confusion over the effect of lower Medicare
reimbursement levels. While our timing was early and hurt the performance of the
Fund in the spring of 1995, the stocks have recently responded positively, a
trend which we believe will continue. Even though Medicare reimbursement has
been cut for many companies, we believe well-managed companies will adjust their
costs accordingly. We also believe health maintenance organizations (HMOs) will
provide many of the solutions to the high level of the nation's health care
costs. We added substantially to United Healthcare (the country's largest HMO
company) during this period of investor confusion, and the stock has since
appreciated by over 50%. Many of our long-term care companies have not yet
rebounded from their depressed levels following the Medicare budget cuts, and
investors are waiting to see whether these companies can adjust their costs
effectively. We believe they will and we continue to maintain our investments in
Integrated Health, Horizon Healthcare and Mariner despite their poor stock price
performance.
This year, the stock market and the Fund's investments moved higher as
companies reported better-than-expected earnings. This environment was very
favorable for many of our companies which reported strong earnings, and we
believe this trend of investors rewarding companies that report strong earnings
will continue into 1996 and could benefit the share prices of these companies.
Our largest sector concentration continues to be technology. While we do not
expect earnings gains to be as strong in 1996 as they were in 1995, we believe
this sector should still have the strongest earnings gains of any group in 1996.
We are also positive on the health care service and consumer sectors. Both
groups performed poorly in 1995, and we believe their stock prices to be
depressed. We believe that the health care cost-containment companies should
ultimately benefit from the cost-reduction initiatives in Washington. Also, we
believe the consumer sector is poised to respond positively to only a small
positive change in consumer spending.
Therefore, we believe 1996 could be the fifth consecutive year of
above-average earnings gains for the S&P 500. U.S. companies are realizing
record returns on their investments as they use technology and outsourcing to
reduce their costs and increase productivity. We are living through an
unprecedented era of productivity gains for the service sector. The downsizing
of corporate America would be detrimental to the U.S. economy if it were not for
the ability of the smaller companies in the United States to absorb and retrain
laid-off workers. We believe these productivity gains are responsible for what
has been one of the best stock market periods on record.
We believe the companies in the portfolio are particularly well suited to
benefit from technology-driven enhancements, while our technology holdings are
providing the tools to the rest of the economy. We remain optimistic that the
progress for our portfolio companies will be rewarded by investors in 1996.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
- ---------------------- ------------------------
A Photo of A Photo of
A. Keith Brodkin, John W. Ballen,
Chairman and President Portfolio Manager
- ---------------------- ------------------------
/s/ A. Keith Brodkin /s/ John W. Ballen
Chairman and President Portfolio Manager
December 13, 1995
PORTFOLIO MANAGER PROFILE
John Ballen began his career at MFS as an industry specialist in 1984 and was
promoted to Investment Officer in 1986, Vice President - Investments in 1987,
Director of Research in 1988 and Senior Vice President in 1990. In 1993, he
became Director of Equity Portfolio Management. He has been the Portfolio
Manager of MFS Emerging Growth Fund since 1987.
<PAGE>
OBJECTIVE AND POLICY
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.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Emerging Growth Fund Class B shares in comparison to various market
indicators. Fund results in the graph do not reflect the deduction of any
contingent deferred sales charge (CDSC) since the CDSC is not applicable after a
six-year period. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. You cannot invest in an index. All results reflect the reinvestment
of all dividends and capital gains.
Please note that effective September 13, 1993, Class A shares were offered.
Information on Class A share performance appears on the next page.
In the table on the next page, we have included the average annual total returns
of all mid-cap funds (including the Fund) tracked by Lipper Analytical Services,
Inc. (an independent firm which rates mutual fund performance) for the
applicable time periods. Because these returns do not reflect any applicable
sales charges, we have also included the Fund's results at net asset value (no
sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed, may
be worth more or less than their original cost. All Class A results reflect the
applicable expense reimbursement. All Class A share results reflect the
applicable expense subsidy which is explained in the Notes to Financial
Statements. Had the subsidy not been in effect, the results would have been less
favorable.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1987 to November 30, 1995)
Line graph representing the growth of a $10,000 investment for the nine-year
period ended November 30, 1995. The graph is scaled from $0 to $60,000 in
$10,000 segments. The years are marked in 12-month segments from 1988 to 1995.
There are four lines drawn to scale. One is a solid line representing MFS
Emerging Growth Fund (Class B), a second line of very-short dashes represents
the S&P 500, a third line of very, very-short dashes represents the Russell 2000
Index, a fourth line of medium-short dashes represents the Consumer Price Index.
MFS Emerging Growth Fund (Class B) $53,176
S&P 500 $33,034
Russell 2000 Index $26,961
Consumer Price Index $13,897
AVERAGE ANNUAL TOTAL RETURNS
Life of
Class
through
1 Year 3 Years 5 Years 11/30/95
- ------------------------------------------------------------------------------
MFS Emerging Growth Fund (Class A)
including 5.75% sales charge +37.61% -- -- +24.18%<F1>
- ------------------------------------------------------------------------------
MFS Emerging Growth Fund (Class A)
at net asset value +45.98% -- -- +27.54%<F1>
- ------------------------------------------------------------------------------
MFS Emerging Growth Fund (Class B)
with CDSC<F2> +40.89% +22.57% +33.35% +20.56%<F3>
- ------------------------------------------------------------------------------
MFS Emerging Growth Fund (Class B)
without CDSC +44.89% +23.23% +33.48% +20.56%<F3>
- ------------------------------------------------------------------------------
Average mid-cap fund +33.69% +15.35% +20.20% +14.62%<F4>
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite
Index +36.93% +15.05% +16.76% +14.34%<F4>
- ------------------------------------------------------------------------------
Russell 2000 Index +28.51% +14.76% +21.30% +11.77%<F4>
- ------------------------------------------------------------------------------
Consumer Price Index<F5> + 2.61% + 2.65% + 2.80% + 3.76%<F4>
- ------------------------------------------------------------------------------
<F1> For the period from the commencement of offering of Class A shares,
September 13, 1993 to November 30, 1995.
<F2> These returns reflect the applicable Class B CDSC of 4%, 3% and 2% for the
1-, 3- and 5- year periods, respectively, and 0% for the period commencing
December 29, 1986.
<F3> For the period from the commencement of offering of Class B shares,
December 29, 1986 to November 30, 1995.
<F4> Benchmark comparisons begin on January 1, 1987. Source: Lipper Analytical
Services, Inc.
<F5> The Consumer Price Index is a popular measure of change in prices.
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1995
Common Stocks and Warrants - 97.9%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Airlines
Atlas Air, Inc.* 77,400 $ 1,180,350
- -----------------------------------------------------------------------------
Apparel and Textiles - 1.0%
Donnkenny, Inc.* 30,000 $ 990,000
Nine West Group, Inc. * 676,316 30,011,522
Team Rent Group, Inc.* 130,000 1,251,250
--------------
$ 32,252,772
- -----------------------------------------------------------------------------
Automotive - 0.1%
APS Holding Corp.* 154,000 $ 2,849,000
Delfecta-Shield Corp.* 15,000 80,625
Safety Components International, Inc.* 28,000 434,000
--------------
$ 3,363,625
- -----------------------------------------------------------------------------
Banks and Credit Companies - 0.1%
Capital One Financial Corp. 28,500 $ 719,625
First Bank System, Inc. 10,900 562,713
Northern Trust Corp. 10,700 559,075
Turkiye Garanti Bankasi, ADR## 32,000 224,000
--------------
$ 2,065,413
- -----------------------------------------------------------------------------
Biotechnology - 0.6%
Guidant Corp. 487,000 $ 18,201,625
Myriad Genetics, Inc.* 26,800 844,200
Perseptive Biosystems, Inc.* 10,000 93,125
--------------
$ 19,138,950
- -----------------------------------------------------------------------------
Business Machines - 0.1%
Affiliated Computer Services, Inc.* 123,900 $ 3,995,775
CMC Industries, Inc.* 75,200 333,700
National Instruments Corp.* 23,800 452,200
--------------
$ 4,781,675
- -----------------------------------------------------------------------------
Business Services - 5.7%
APAC Teleservices, Inc.* 45,700 $ 1,445,262
Accustaff, Inc.* 110,000 3,300,000
BISYS Group, Inc.* 390,623 11,035,100
Business Resource Group* 59,600 260,750
CUC International, Inc.* 2,122,450 80,653,100
Computer Sciences Corp.* 95,000 6,911,250
Corestaff, Inc.* 41,900 1,330,325
DST Systems, Inc.* 76,150 2,198,831
Equity Corp., International* 125,000 2,437,500
Fiserv, Inc. * 247,500 6,558,750
Franklin Quest Co.* 764,500 14,429,938
Global Directmail Corp.* 313,300 8,733,238
HPR, Inc.* 14,500 420,500
Interim Services Inc.* 200,000 6,400,000
Mail Well Holdings, Inc.* 404,000 4,646,000
National Data Corp. 74,700 1,820,813
Personal Group of America, Inc.* 29,900 362,537
RTW, Inc.* 24,000 636,000
Romac International, Inc.* 16,300 326,000
Rural/Metro Corp.* 234,700 5,750,150
SOS Staffing Services, Inc.* 75,000 656,250
SPS Transaction Services, Inc.* 512,045 14,145,243
Stewart Enterprises, Inc. 277,400 9,084,850
TRM Copy Centers Corp.* 18,700 182,325
Technology Solutions Co.* 42,700 725,900
Transaction Systems Architects, Inc., "A"* 111,400 3,035,650
--------------
$ 187,486,262
- -----------------------------------------------------------------------------
Cellular Phones
Telephone & Data Systems, Inc. 9,700 $ 369,813
- -----------------------------------------------------------------------------
Chemicals
Uniroyal Chemical Corp.* 183,400 $ 1,467,200
- -----------------------------------------------------------------------------
Computer Software - 0.8%
Applix, Inc.* 24,000 $ 981,000
CBT Group, PLC* 62,000 3,348,000
DSP Communications, Inc.* 65,000 2,851,875
Diamond Multimedia Systems, Inc.* 64,200 2,166,750
Epic Design Technology, Inc.* 31,800 675,750
Expert Software, Inc.* 16,500 278,438
Hummingbird Communications* 302,200 15,185,550
Network Peripherals, Inc.* 33,700 454,950
Number Nine Visual Technology* 15,300 179,775
Objective Systems Integrator* 38,100 723,900
P-COM, Inc.* 19,800 346,500
Stormedia, Inc.* 16,300 647,925
--------------
$ 27,840,413
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 5.1%
A.D.A.M Software, Inc.* 20,800 $ 221,000
ASM Lithography Holding* 30,000 1,263,750
Acclaim Entertainment, Inc.* 100,000 2,106,250
Advent Software, Inc.* 9,300 195,300
Arbor Software Corp.* 9,700 417,100
Autodesk, Inc.++ 2,894,770 102,040,642
Avant Corp.* 16,800 756,000
Datastream Systems, Inc.* 10,000 182,500
Electronic Arts, Inc.* 260,600 8,892,975
First Data Corp. 12,052 855,692
Insight Enterprises, Inc.* 81,000 1,194,750
Learning Co.* 73,100 4,440,825
Macromedia, Inc.* 76,000 3,534,000
Mapinfo Corp.* 50,000 975,000
Maxis, Inc.* 22,700 930,700
McAfee Associates, Inc.* 11,299 539,527
Metatec Corp.* 70,000 726,250
Microsoft Corp.* 120,000 10,455,000
Pure Software, Inc.* 25,400 831,850
Simware, Inc.* 82,300 555,525
Smith Micro Software, Inc.* 28,200 274,950
Softdesk, Inc.* 37,600 864,800
Softkey International, Inc.* 390,000 13,162,500
Software Artistry, Inc.* 10,700 197,950
Spectrum Holobyte Industries* 65,600 565,800
State of the Art, Inc.* 120,000 1,245,000
Symantec Corp.* 310,000 8,215,000
TGV Software, Inc.* 20,100 170,850
TIVOLI Systems, Inc.* 15,000 446,250
Touchstone Software Corp.* 100,700 654,550
Visio Corp.* 21,900 585,825
--------------
$ 167,498,111
- -----------------------------------------------------------------------------
Computer Software - Systems - 21.9%
Adobe Systems, Inc. 171,300 $ 11,584,163
Applied Microsystems Corp.* 36,500 333,063
Aspen Technology, Inc.* 20,000 600,000
ASTEA International, Inc.* 22,000 451,000
BAAN Co.* 29,200 1,324,950
BDM International, Inc.* 43,400 1,160,950
BMC Software, Inc. * 1,901,550 80,340,488
Black Box Corp.* 75,000 1,265,625
C ATS Software, Inc.* 20,400 137,700
Cadence Design Systems, Inc.* 2,513,250 90,477,000
Carnegie Group, Inc.* 150,000 1,406,250
Clarify, Inc.* 16,200 447,525
Computer Associates International, Inc. 1,060,000 69,430,000
Computer Management Sciences, Inc.* 13,100 248,900
Computron Software, Inc.* 29,400 448,350
Compuware Corp.*++ 2,199,524 45,090,242
Cooper & Chyan Technology* 22,200 308,025
Datalogix International, Inc.* 22,100 265,200
Discreet Logic, Inc.* 29,200 890,600
Enterprise Systems, Inc.* 12,900 403,125
Firefox Communications, Inc.* 14,900 324,075
Fractal Design Corp.* 22,600 322,050
HNC Software, Inc.* 12,800 518,400
Harbinger Corp.* 10,000 251,250
Imnet Systems, Inc.* 35,700 883,575
Informix Corp.* 1,876,518 51,956,092
Insignia Solutions, Inc., ADR* 32,400 660,150
Integrated Measurement Systems* 28,900 379,313
Keane, Inc.* 209,300 5,781,912
Lexmark International Group, "A"* 276,800 5,363,000
Logic Works, Inc.* 57,100 842,225
Marcam Corp.*++ 576,800 9,877,700
Meta-Software, Inc.* 18,900 321,300
Mysoftware Co.* 28,800 432,000
Nerwork Appliance, Inc.* 22,600 683,650
Open Environment Corp.* 23,200 232,000
Oracle Systems Corp.* 3,596,800 163,204,800
Photon Dynamics, Inc.* 32,100 312,975
Pixar, Inc.* 30,600 1,246,950
Premenos Technology Corp.* 35,700 1,517,250
Programmers Paradise, Inc.* 76,000 636,500
Psinet, Inc.* 20,300 428,837
Quickturn Design System, Inc.* 66,000 676,500
Radisys Corp.* 125,400 1,567,500
Remedy Corp.* 13,800 848,700
Renaissance Solutions, Inc.* 16,600 282,200
STB Systems, Inc.* 20,000 212,500
Scopus Technology* 15,800 375,250
Secure Computing Corp.* 16,800 961,800
Security Dynamics Technology* 29,800 1,475,100
Seer Technologies, Inc.* 17,600 257,400
Shiva Corp.* 29,700 2,197,800
Smartflex Systems, Inc.* 42,300 745,537
Spyglass, Inc.* 7,000 750,750
Summit Medical Systems, Inc.* 26,900 598,525
Sybase, Inc.* 2,328,089 81,774,126
Sync Research, Inc.* 19,400 984,550
System Software Associates, Inc.++ 2,045,100 73,623,600
Unison Software, Inc.* 16,200 190,350
Uunet Technologies, Inc.* 32,200 2,559,900
Vantive Corp.* 16,000 408,000
Verity, Inc.* 32,900 1,636,775
--------------
$ 724,916,023
- -----------------------------------------------------------------------------
Construction Services
Shaw Group Inc.* 159,400 $ 1,554,150
- -----------------------------------------------------------------------------
Consumer Goods and Services - 0.5%
Bell Sports Corp.* 109,551 $ 890,102
Blyth Inds, Inc.* 57,700 3,238,413
Bollinger Inds, Inc.* 45,000 112,500
Cerplex Group, Inc.* 133,800 986,775
Department 56 Inc.* 19,050 785,812
First Alert, Inc.* 20,000 212,500
Fresh America Corp.* 42,500 350,625
Oakley, Inc.* 25,000 800,000
Perrigo Co.* 141,000 1,850,625
Service Corp. International 166,200 6,751,875
Sola International, Inc.* 63,000 1,716,750
--------------
$ 17,695,977
- -----------------------------------------------------------------------------
Electrical Equipment
Brooks Automation, Inc.* 10,000 $ 170,000
Chicago Miniature Lamp, Inc.* 10,000 210,000
Integrated Silicon Solution* 20,700 496,800
Zycon Corp.* 52,700 678,512
--------------
$ 1,555,312
- -----------------------------------------------------------------------------
Electronics - 4.3%
ACT Manufacturing, Inc.* 24,800 $ 372,000
ADE Corp.* 50,000 812,500
AG Associates, Inc.* 24,600 448,950
AVX Corp. 95,800 2,754,250
Actel Corp.* 40,000 530,000
Altera Corp.* 290,300 16,837,400
Anadigics, Inc.* 22,300 440,425
Burr Brown Corp.* 215,600 6,198,500
CP Clare Corp.* 180,000 4,455,000
Cincinnati Microwave, Inc.* 100,000 700,000
Cyberoptics Corp.* 35,000 1,181,250
ESS Technology, Inc.* 37,100 1,224,300
Euphonix, Inc.* 70,000 595,000
Gasonics International Corp.* 69,000 1,224,750
General Scanning, Inc.* 21,000 254,625
Information Storage Devices* 85,000 1,508,750
LSI Logic Corp.* 412,000 17,252,500
Linear Technology Corp. 482,800 21,846,700
MEMC Electronic Materials, Inc.* 61,000 2,020,625
Maxim Integrated Products, Inc.* 12,500 937,500
Micrel, Inc.* 29,800 491,700
Micro Linear Corp.* 108,600 1,221,750
National Semiconductor Corp.* 60,000 1,282,500
Novellus Systems, Inc.* 152,000 9,424,000
Oak Technology, Inc.* 246,800 11,599,600
Ontrak Systems, Inc.* 23,800 398,650
Paradigm Technology, Inc.* 17,900 326,675
Quality Semiconductor, Inc.* 5,000 40,000
Ross Technology, Inc.* 19,300 253,312
SDL, Inc.* 12,600 283,500
Sandisk Corp.* 33,500 745,375
Semitool, Inc.* 38,700 619,200
Telcom Semiconductor, Inc.* 42,200 353,425
Tower Semiconductor Ltd.* 250,000 6,218,750
Ultratech Stepper, Inc.* 109,800 4,144,950
Veeco Instruments, Inc.* 30,000 532,500
Xilinx, Inc.* 662,000 21,266,750
--------------
$ 140,797,662
- -----------------------------------------------------------------------------
Entertainment - 3.8%
Ambassadors International, Inc.* 86,100 $ 753,375
American Radio Systems, "A"* 31,800 723,450
Argosy Gaming Corp.* 100,100 850,850
Aztar Corp.* 30,100 263,375
Boomtown, Inc.*## 35,000 218,750
Casino America, Inc.* 412,000 2,420,500
Central European Media Enterprises Ltd.* 21,700 477,400
GT Bicycles, Inc.* 81,600 785,400
Grand Casinos, Inc.* 983,300 36,136,275
Harrah's Entertainment, Inc.* 2,104,402 52,347,000
Heftel Broadcasting Corp., "A"* 130,500 1,924,875
Heritage Media Corp.* 59,400 1,551,825
Hollywood Park, Inc.* 40,000 410,000
Infinity Broadcasting Corp., "A"* 365,150 11,684,800
Jacor Communications, Inc.* 30,000 517,500
Lodgenet Entertainment Corp.* 30,000 330,000
Marvel Entertainment Group, Inc.* 20,000 230,000
Monarch Casino & Resort, Inc.* 90,000 405,000
National Gaming Corp.*++ 260,000 2,567,500
Players International, Inc.* 261,250 3,461,562
President Casinos, Inc.* 600,000 1,462,500
Radica Games Ltd.* 210,000 393,750
Showboat, Inc. 180,000 4,860,000
Sinclair Broadcast Group, "A"* 38,900 768,275
Starsight Telecast, Inc.* 15,700 64,762
Station Casinos, Inc.* 85,000 1,275,000
--------------
$ 126,883,724
- -----------------------------------------------------------------------------
Financial Institutions - 0.3%
Advanta Corp., "B" 13,000 $ 503,750
BHC Financial, Inc. 37,875 705,422
Banca Quadrum S.A., ADR* 131,800 790,800
Credit Acceptance Corp.* 125,000 2,562,500
Finova Group, Inc. 10,900 528,650
First Investment Financial Services Group* 88,300 894,038
First Merchants Acceptance Corp.* 45,000 888,750
Franklin Resources, Inc. 13,600 719,100
Investors Financial Services Co.* 9,300 181,350
Jayhawk Acceptance Corp.* 45,000 562,500
TFC Enterprises, Inc.* 15,000 102,187
Union Acceptance Corp.* 30,000 457,500
WFS Financial, Inc.* 32,600 533,825
--------------
$ 9,430,372
- -----------------------------------------------------------------------------
Food and Beverage Products - 0.1%
Boston Beer, Inc.* 17,100 $ 440,325
Pete's Brewing Co.* 33,700 825,650
Rocky Mountain Chocolate Factory* 67,100 821,975
--------------
$ 2,087,950
- -----------------------------------------------------------------------------
Insurance - 0.4%
Amerin Corp.* 117,100 $ 2,576,200
Compdent Corp.* 159,300 5,535,675
Equitable of Iowa Cos. 18,500 647,500
Lasalle Research Holdings Ltd.* 64,100 1,330,075
Meadowbrook Insurance Group, Inc.* 27,100 752,025
PMI Group, Inc. 30,000 1,425,000
Prudential Reinsurance Holdings, Inc.* 90,000 1,878,750
--------------
$ 14,145,225
- -----------------------------------------------------------------------------
Machinery - 0.1%
Computational Systems, Inc.* 29,500 $ 442,500
Hardinge Bros., Inc. 15,000 376,875
Westinghouse Air Brake Co. 178,900 1,654,825
--------------
$ 2,474,200
- -----------------------------------------------------------------------------
Medical and Health Products - 0.9%
Amerisource Healthcare Corp., "A"* 33,800 $ 980,200
Boston Scientific Corp.* 260,000 10,530,000
Haemonetics Corp.* 40,000 710,000
Health Management, Inc.* 179,000 2,416,500
Healthdyne, Inc.* 378,500 2,933,375
ICU Medical, Inc.* 60,000 697,500
Medcath, Inc.* 30,000 517,500
Medisense, Inc.* 127,500 3,283,125
Orthofix International N.V.* 473,749 4,263,741
Parexel International Corp.* 19,500 438,750
Perclose, Inc.* 60,000 840,000
Sofamor/Danek Group, Inc.* 30,100 692,300
Tokos Medical Corp.* 200,000 1,650,000
Uromed Corp.* 35,165 356,046
Zoll Medical Corp.* 107,500 954,062
--------------
$ 31,263,099
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 18.7%
AHI Healthcare Systems, Inc.* 47,700 $ 560,475
Advantage Health Corp.* 128,300 4,233,900
American Homepatient, Inc.* 80,500 2,243,938
American Medical Response* 44,500 1,273,812
American Oncology Resources, Inc.* 36,800 1,306,400
CRA Managed Care, Inc.* 31,900 741,675
Clintrials Research* 30,000 528,750
Columbia/HCA Healthcare 472,123 24,373,350
Community Care of America* 100,000 1,212,500
Community Health Systems, Inc.* 597,800 20,474,650
FPA Medical Management, Inc.* 250,000 1,562,500
First Commonwealth, Inc.* 12,600 277,200
Foundation Health Corp.* 894,000 40,900,500
Genesis Health Ventures, Inc.* 93,500 3,050,437
HCIA, Inc.* 16,400 742,100
Health Management Assoc., Inc.* 39,000 1,033,500
Healthdyne Technologies Information Enterprises* 378,500 567,750
Healthdyne, Inc.* 246,293 2,678,437
Healthplan Services Corp.* 58,000 1,377,500
Healthsource, Inc.* 382,305 23,894,063
HealthWise of America, Inc.* 102,500 3,203,125
Horizon/CMS Healthcare Corp.* 510,325 11,035,778
IDX Systems Corp.* 21,300 585,750
Integrated Health Services,Inc.++ 1,404,927 31,084,010
Lincare Holdings, Inc.* 196,300 5,251,025
Living Centers Of America* 190,600 5,980,075
Manor Care, Inc. 78,600 2,564,325
Mariner Health Group, Inc.* 888,900 11,889,037
Medpartners, Inc.* 25,000 709,375
Mid Atlantic Medical Services,Inc.*++ 3,120,600 76,064,625
Multicare Cos Inc.* 80,900 1,688,788
National Surgery Centers, Inc.* 18,800 399,500
Occusystems, Inc.* 13,100 253,812
Option Care, Inc.* 140,000 560,000
Orthodontic Centers of America* 225,000 7,143,750
Owen Healthcare, Inc.* 214,600 4,667,550
Oxford Health Plans, Inc.* 56,100 4,207,500
Pacific Physician Services, Inc.* 17,350 286,275
Pacificare Health Systems, Inc., "A"* 194,900 16,566,500
Pacificare Health Systems, Inc., "B"* 817,146 70,887,416
Pediatric Services of America, Inc.* 45,000 843,750
Pediatrix Medical Group* 37,400 766,700
Physician Corp. of America* 23,500 355,437
Physician Reliance Network, Inc.* 100,000 3,550,000
Physician Sales & Service, Inc.* 42,000 798,000
Physicians Resource Group, Inc.* 110,300 2,399,025
Professional Sports Care Management* 60,000 397,500
Quorum Health Group, Inc.* 66,100 1,429,412
Renal Treatment Centers, Inc.* 410,000 16,553,750
Renal Treatment Centers,Inc.*+ 17,651 712,659
Schein Henry, Inc.* 26,850 677,963
Sierra Health Services, Inc.* 27,700 907,175
Sterling Healthcare Group* 105,600 1,320,000
Sterling House Corp.* 27,300 303,712
Sun Health Care Group, Inc.* 90,000 1,113,750
Surgical Care Affiliates, Inc. 394,200 12,811,500
Total Renal Care Holdings, Inc.* 29,900 803,563
United Dental Care, Inc.* 25,400 850,900
United Healthcare Corp. 2,889,786 181,695,295
Wellcare Management, Inc.* 77,700 1,651,125
--------------
$ 618,002,869
- -----------------------------------------------------------------------------
Metals and Minerals
Castech Alum Group, Inc.* 69,400 $ 1,058,350
- -----------------------------------------------------------------------------
Pollution Control - 0.9%
Laidlaw, Inc. 801,570 $ 7,414,523
Republic Industries, Inc.* 760,000 20,425,000
Sanifill, Inc.* 80,800 2,706,800
--------------
$ 30,546,323
- -----------------------------------------------------------------------------
Printing and Publishing
Desktop Data, Inc.* 15,400 $ 411,950
- -----------------------------------------------------------------------------
Railroad
Railtex Inc.* 5,000 $ 101,250
Wisconsin Central Transportation Corp.* 10,900 632,200
--------------
$ 733,450
- -----------------------------------------------------------------------------
Real Estate - 0.2%
NHP, Inc.* 444,700 $ 7,337,550
- -----------------------------------------------------------------------------
Restaurants and Lodging - 14.5%
Amerihost Properties, Inc.*++ 451,000 $ 2,762,375
Apple South, Inc. 412,150 8,655,150
Applebee's International, Inc.++ 1,960,800 54,412,200
Back Bay Restaurant Group, Inc.*++ 185,100 1,064,325
Bertucci's, Inc.* 379,700 1,993,425
Brinker International, Inc.* 1,640,300 25,219,613
Buffets, Inc.*++ 1,568,000 20,776,000
Bugaboo Creek Steak House, Inc.* 35,000 297,500
Cheesecake Factory* 10,000 225,000
Doubletree Corp.* 185,300 3,937,625
Ground Round Restaurants, Inc.* 241,000 647,687
HFS, Inc.*++ 3,220,805 223,040,746
Hammons (John Q) Hotels, Inc.*++ 544,300 5,374,962
Hometown Buffet, Inc.*++ 909,000 9,885,375
IHOP Corp.*++ 612,200 15,840,675
Innkeepers USA Trust 207,000 1,888,875
Italian Oven, Inc.* 230,000 1,840,000
La Quinta Inns, Inc. 76,000 2,061,500
Lone Star Steakhouse and Saloon, Inc.* 370,500 14,542,125
Papa John's International, Inc.* 25,000 1,071,875
Promus Hotel Corp.* 1,546,701 34,220,760
Quantum Restaurant Group, Inc.*++ 553,200 6,776,700
Renaissance Hotel Group* 687,000 14,427,000
ShoLodge, Inc.* 375,600 3,521,250
Showbiz Pizza Time, Inc.*++ 755,000 9,626,250
Sonic Corp.* 436,950 9,612,900
Studio Plus Hotels of America, Inc.* 20,700 457,988
Supertel Hospitality, Inc.* 30,000 360,000
Taco Cabana, Inc.*++ 962,395 5,172,873
UNO Restaurant Corp.* 164,500 1,130,938
--------------
$ 480,843,692
- -----------------------------------------------------------------------------
Special Products and Services - 0.4%
Central Packaging Corp.* 44,400 $ 1,221,000
Central Tractor Farm & Country, Inc.* 5,000 48,750
Childrens Discovery Centers* 125,000 968,750
Educational Insights, Inc.* 46,500 162,750
ITT Educational Services, Inc.* 149,500 3,064,750
Plasma & Materials Technology* 16,100 197,225
Simula, Inc.* 35,000 713,125
Sphere Drake Holdings Ltd.* 405,000 5,821,875
Sportmart, Inc., "A"* 96,000 474,000
West Marine, Inc.* 30,000 1,008,750
--------------
$ 13,680,975
- -----------------------------------------------------------------------------
Steel - 0.1%
Carbide/Graphite Group, Inc.* 36,600 $ 549,000
Citation Corp.* 203,000 3,273,375
--------------
$ 3,822,375
- -----------------------------------------------------------------------------
Stores - 10.1%
AutoZone, Inc.* 11,487 $ 334,559
BT Office Products International, Inc.* 465,000 5,928,750
Bed Bath & Beyond, Inc.* 70,000 2,301,250
Boise Cascade Office Products* 160,700 5,885,637
Borders Group, Inc.* 200,000 3,525,000
Circle K Corp.* 187,500 4,453,125
CompUSA, Inc.* 110,000 4,083,750
Consolidated Stores Corp.* 825,700 20,436,075
Corporate Express, Inc.* 348,000 9,309,000
Creative Computers, Inc.* 76,000 2,052,000
De Rigo SPA-ADR* 42,800 909,500
Dollar Tree Stores, Inc.* 176,500 4,942,000
Duty Free International, Inc. 687,800 9,285,300
Finish Line (The), Inc., "A"* 20,000 180,000
General Nutrition Cos., Inc.* 264,000 5,841,000
Grow Biz International, Inc.* 60,000 547,500
Gymboree Corp.* 318,750 7,530,469
Hello Direct, Inc.* 42,000 231,000
Hollywood Entertainment, Corp.* 1,050,000 16,931,250
Micro Warehouse, Inc.*++ 1,730,600 81,338,200
Moovies, Inc.* 18,300 292,800
Mothers Work, Inc.*++ 211,500 2,908,125
Movie Gallery, Inc.* 378,100 12,949,925
National Vision Associates Ltd.* 203,700 662,025
Natural Wonders, Inc.* 28,600 82,225
Office Depot, Inc.* 3,993,600 97,843,200
Officemax, Inc.* 739,100 16,814,525
PetSmart, Inc.* 67,487 2,176,456
Renters Choice, Inc.* 315,900 5,172,862
Shoe Carnival, Inc.* 487,000 1,887,125
Sports & Recreation, Inc.* 45,000 315,000
Sports Club, Inc.* 196,000 710,500
Sunglass Hut International, Inc.* 150,000 3,150,000
U.S. Office Products Co.* 92,500 1,549,375
Welcome Home, Inc.* 88,900 205,581
--------------
$ 332,765,089
- -----------------------------------------------------------------------------
Telecommunications - 5.3%
3Com Corp.* 104,622 $ 4,786,456
ACT Networks, Inc.* 16,400 170,150
Accom, Inc.* 30,500 232,562
Ascend Communications, Inc.* 115,000 8,222,500
Bay Networks, Inc.* 551,163 24,802,335
Cabletron Systems, Inc.* 520,200 43,176,600
Cisco Systems, Inc.* 50,000 4,206,250
Colonial Data Technologies* 171,200 2,717,800
Comdial Corp.* 125,000 1,312,500
Equalnet Holding Corp.*++ 447,000 8,604,750
Harmonic Lightwaves, Inc.* 18,300 192,150
Midcom Communications, Inc.* 99,000 1,757,250
Mobilemedia Corp., "A"* 74,500 1,927,688
Ortel Corp.* 24,200 284,350
Paging Network, Inc.* 44,000 979,000
Premisys Communications, Inc.* 14,900 1,434,125
Sitel Corp* 27,400 705,550
T-Netix, Inc.* 27,000 276,750
Tel-Save Holdings, Inc.* 704,900 10,044,825
Teltrend, Inc.* 25,000 1,000,000
Transwitch Corp.* 10,000 126,250
Videoserver, Inc.* 19,600 627,200
Westell Technologies, Inc.* 33,000 429,000
Worldcom, Inc.* 1,743,685 56,669,763
Xpedite Systems, Inc.* 35,000 516,250
--------------
$ 175,202,054
- -----------------------------------------------------------------------------
Trucking - 0.3%
Celadon Group, Inc.* 23,000 $ 215,625
MTL, Inc.* 45,000 590,625
PST Vans, Inc.* 58,900 364,444
Transport Corp. of America, "B"*++ 540,000 6,885,000
US Xpress Enterprises, Inc., "A"* 34,200 252,225
--------------
$ 8,307,919
- -----------------------------------------------------------------------------
Utilities - Telephone - 0.1%
Frontier Corporation 87,400 $ 2,261,475
- -----------------------------------------------------------------------------
Venture Capital - 0.3%
Copley Partners 1+ # 3,000,000 $ 761,724
Copley Partners 2+ # 3,000,000 2,029,296
Highland Capital Partners+ ++ 7,500,000 8,320,425
--------------
$ 11,111,445
- -----------------------------------------------------------------------------
Foreign - 1.2%
Australia - 0.6%
Sydney Harbor Casino Ltd 15,612,000 $ 20,987,004
Canada - 0.3%
Rogers Communications, Inc., "B" 799,000 8,377,419
Netherlands -
Call Net Enterprises, Inc., "B"*## 125,000 873,740
New Zealand - 0.3%
Sky City Ltd.* 390,000 7,949,906
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 38,188,069
- -----------------------------------------------------------------------------
Total Common Stocks and Warrants (Identified Cost,
$2,063,087,976) $3,244,521,863
- -----------------------------------------------------------------------------
Convertible Bonds - 0.2%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Entertainment - 0.1%
Argosy Gaming Corp., 12s, 2001 $ 4,176 $ 3,920,220
- -----------------------------------------------------------------------------
Restaurants and Lodging -- 0.1%
ShoLodge, Inc., 7.5s, 2004 $ 2,000 $ 1,590,000
- -----------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $6,332,493) $ 5,510,220
- -----------------------------------------------------------------------------
Short-Term Obligations - 3.5%
- -----------------------------------------------------------------------------
Federal Home Loan Bank, due 12/06/95 $ 1,200 $ 1,199,053
Federal Home Loan Bank, due 12/07/95 2,000 1,998,113
Federal Home Loan Mortgage Corp., due 12/06/95 50,000 49,960,556
Federal National Mortgage Association,
due 12/13/95 7,450 7,435,960
General Electric Co., due 12/01/95 55,570 55,570,000
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 116,163,682
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $2,185,584,151) $3,366,195,765
Other Assets, Less Liabilities - (1.6)% (53,675,767)
=============================================================================
Net Assets - 100.0% $3,312,519,998
- -----------------------------------------------------------------------------
* Non-income producing security.
+ Restricted security.
# Security valued by or at the direction of the Trustees.
++ 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.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $1,720,178,918) $2,571,378,890
Affiliated issuers (identified cost, $465,405,233) 794,816,875
--------------
Total investments, at value (identified cost,
$2,185,584,151) $3,366,195,765
Cash 146,892
Receivable for investments sold 3,418,864
Receivable for Fund shares sold 18,450,761
Interest and dividends receivable 334,566
Other assets 38,780
--------------
Total assets $3,388,585,628
--------------
Liabilities:
Payable for investments purchased $ 59,491,278
Payable for Fund shares reacquired 14,083,954
Payable to affiliates -
Management fee 66,439
Shareholder servicing agent fee 13,419
Distribution fee 1,309,663
Accrued expenses and other liabilities 1,100,877
--------------
Total liabilities $ 76,065,630
--------------
Net assets $3,312,519,998
==============
Net assets consist of:
Paid-in capital $2,132,225,191
Unrealized appreciation on investments 1,180,611,614
Accumulated undistributed net realized gain on
investments and foreign currency transactions (254,230)
Accumulated net investment loss (62,577)
--------------
Total $3,312,519,998
==============
Shares of beneficial interest outstanding 124,309,581
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $1,311,527,175 / 48,960,009 shares of
beneficial interest outstanding) $26.79
======
Offering price per share (100/94.25) $28.42
======
Class B shares:
Net asset value and offering price per share
(net assets of $2,000,992,823 / 75,349,572 shares of
beneficial interest outstanding) $26.56
======
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, 1995
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest (including $118,667 received from affiliated
issuers) $ 3,663,824
Dividends (including $769,629 received from affiliated
issuers) 1,591,294
------------
Total investment income $ 5,255,118
------------
Expenses -
Management fee $ 15,957,197
Trustees' compensation 46,371
Shareholder servicing agent fee (Class A) 1,138,405
Shareholder servicing agent fee (Class B) 2,395,389
Distribution and service fee (Class A) 2,885,152
Distribution and service fee (Class B) 13,039,043
Custodian fee 636,520
Postage 344,499
Printing 227,744
Legal fees 122,732
Auditing fees 36,075
Miscellaneous 1,693,613
------------
Total expenses $ 38,522,740
Fees paid indirectly (79,255)
Reduction of expenses by distributor (823,866)
------------
Net expenses $ 37,619,619
------------
Net investment loss $(32,364,501)
============
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions (including $2,408,437 net gain from
transactions with affiliated issuers) $ 10,015,363
Foreign currency transactions (119,160)
------------
Net realized gain on investments $ 9,896,203
------------
Change in unrealized appreciation -
Investments $847,011,945
Translation of assets and liabilities in foreign currencies 1,885
------------
Net unrealized gain on investments $847,013,830
------------
Net realized and unrealized gain on investments and
foreign currency $856,910,033
------------
Increase in net assets from operations $824,545,532
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended November 30, 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (32,364,501) $ (18,775,234)
Net realized gain on investments and foreign
currency transactions 9,896,203 40,986,707
Net unrealized gain on investments and foreign
currency 847,013,830 64,922,879
--------------- --------------
Increase in net assets from operations $ 824,545,532 $ 87,134,352
--------------- --------------
Distributions declared to shareholders -
From net realized gain on investments and foreign
currency transactions (Class A) $ (9,533,382) $ (11,484,710)
From net realized gain on investments and foreign
currency transactions (Class B) (10,006,703) (17,957,239)
Tax return of capital (544,859) --
--------------- --------------
Total distributions declared to shareholders $ (20,084,944) $ (29,441,949)
--------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 3,022,835,060 $ 933,615,981
Net asset value of shares issued to shareholders
in reinvestment of distributions 17,796,191 25,655,969
Cost of shares reacquired (1,771,034,994) (750,977,096)
--------------- --------------
Increase in net assets from Fund share
transactions $ 1,269,596,257 $ 208,294,854
--------------- --------------
Total increase in net assets $ 2,074,056,845 $ 265,987,257
Net assets:
At beginning of period 1,238,463,153 972,475,896
--------------- --------------
At end of period (including accumulated net
investment loss of $62,577 and $43,710,
respectively) $ 3,312,519,998 $1,238,463,153
=============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended November 30, 1995 1994 1993<F1> 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Class A Class B
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout
each period):
Net asset value -
beginning of period $18.73 $17.68 $16.43 $18.57 $17.64 $14.93
------ ------ ------ ------ ------ ------
Income from investment
operations<F4> -
Net investment loss $(0.23) $(0.20) $(0.03) $(0.41) $(0.35) $(0.33)
Net realized and
unrealized gain on
investments 8.68 1.78 1.28 8.65 1.78 3.19
------ ------ ------ ------ ------ ------
Total from investment
operations $ 8.45 $ 1.58 $ 1.25 $ 8.24 $ 1.43 $ 2.86
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders -
From net realized gain
on investments $(0.38) $(0.53) $ -- $(0.24) $(0.50) $(0.15)
In excess of net
realized gain on investments --<F2> --<F2> -- -- -- --
Tax return of capital (0.01) -- -- (0.01) -- --
Total distributions
declared to
shareholders $(0.39) $(0.53) -- $(0.25) $(0.50) $(0.15)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $26.79 $18.73 $17.68 $26.56 $18.57 $17.64
====== ====== ====== ====== ====== ======
Total return<F6> 45.98% 9.06% 38.98%<F3> 44.89% 8.21% 19.36%
Ratios (to average net
assets)/Supplemental data<F7>:
Expenses<F5> 1.28% 1.33% 1.19%<F3> 2.08% 2.14% 2.19%
Net investment loss (1.04)% (1.09)% (0.98)%<F3> (1.83)% (1.90)% (1.61)%
Portfolio turnover 20% 39% 58% 20% 39% 58%
Net assets at end of
period (000,000 omitted) $1,312 $ 470 $ 371 $2,001 $ 769 $ 602
<FN>
<F1> For the period from the date of issue of Class A shares, September 13, 1993 to November 30, 1993.
<F2> The per share distribution in excess of net realized gain on investments was $0.0049 and $0.0031 per share for Class A and
Class B shares, respectively.
<F3> Annualized.
<F4> Per share data for the periods subsequent to December 1, 1993 is based on average shares outstanding.
<F5> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
<F6> 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.
<F7> 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 net investment loss per share and ratios would have been:
Net investment loss $(0.25) $(0.22) -- -- -- --
Ratios (to average net assets):
Expenses## 1.38% 1.43% -- -- -- --
Net investment loss (1.14)% (1.19)% -- -- -- --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended November 30, 1992 1991 1990 1989 1988 1987<F1>
- -------------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout
each period):
Net asset value -
beginning of period $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97 $ 5.50
------ ------ ------ ------ ------ ------
Income from investment
operations -
Net investment loss $(0.07) $(0.13) $(0.14) $(0.13) $(0.11) $(0.06)
Net realized and
unrealized gain (loss)
on investments 3.52 5.31 (0.66) 1.91 1.05 (0.47)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 3.45 $ 5.18 $(0.80) $ 1.78 $ 0.94 $(0.53)
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders
from net realized gain on
investments $(0.59) $ -- $ -- $ -- $ -- $ --
------ ------ ------ ------ ------ ------
Net asset value - end of
period $14.93 $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97
====== ====== ====== ====== ====== ======
Total return 29.25% 75.18% (10.40)% 30.12% 18.91% (10.44)%<F2>
Ratios (to average net assets)
/Supplemental data:
Expenses 2.33% 2.50% 2.75% 2.81% 2.30% 2.40%<F2>
Net investment loss (2.00)% (1.98)% (1.86)% (1.91)% (1.65)% (1.50)%<F2>
Portfolio turnover 59% 112% 86% 95% 57% 81%
Net assets at end of
period (000,000 omitted) $ 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> Annualized.
</TABLE>
See notes to financial statements
<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
market value. Securities for which there are no such quotations or valuations
are valued at fair value as determined in good faith by or at the direction of
the Trustees.
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.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend payments received in additional securities are recorded on the
ex-dividend date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return, and consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. 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, 1995, $32,345,634 and $9,286,629 were
reclassified from 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, net operating losses and tax basis
returns of capital. 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 both Class A
and Class B shares. The two classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the common expenses of the Fund pro rata based on the average daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Neither class has preferential dividend
rights; differences in per share dividend rates are generally due to differences
in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $14,996 for the year ended
November 30, 1995. Distributor - MFD, a wholly owned subsidiary of MFS, as
distributor, received $1,055,053 for the year ended November 30, 1995, as its
portion of the sales charge on sales of Class A shares of the Fund.
The Trustees have adopted a separate distribution plan for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $223,471 for the year
ended November 30, 1995. MFD is currently waiving the 0.10% distribution fees
for an indefinite period. Fees incurred under the distribution plan during the
year ended November 30, 1995 net of waiver were 0.25% of average daily net
assets attributable to Class A shares on an annualized basis.
The Class B distribution plan provides that the Fund will pay MFD a monthly
distribution fee, of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B shares.
MFD will pay to securities dealers that enter into a sales agreement with MFD
all or a portion of the service fee attributable to Class B shares. The service
fee is intended to be additional consideration for services rendered by the
dealer with respect to Class B shares. MFD retains the service fee for accounts
not attributable to a securities dealer, which amounted to $138,941 for Class B
shares for the year ended November 30, 1995. Fees incurred under the
distribution plan during the year ended November 30, 1995 were 1.00% of average
daily net assets attributable to Class B shares on an annualized basis.
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
shareholder 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 shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended November 30, 1995 were $9,946 and
$1,787,150 for Class A shares and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an 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 $1,605,510,997 and $428,557,664, 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 $2,185,584,151
==============
Gross unrealized appreciation $1,303,214,394
Gross unrealized depreciation (122,602,780)
--------------
Net unrealized appreciation $1,180,611,614
==============
(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
1995 1994
Year Ended ----------------------------- ---------------------------
November 30, Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 67,800,740 $1,533,247,118 26,143,949 $483,879,494
Shares issued
to shareholders
in reinvestment
of distributions 488,159 9,182,865 584,374 10,565,806
Shares reacquired (44,418,694) (1,017,261,903) (22,607,024) (420,205,407)
----------- -------------- ------------ -------------
Net increase 23,870,205 $ 525,168,080 4,121,299 $ 74,239,893
========== ============== ============ =============
Class B Shares
1995 1994
Year Ended ----------------------------- ---------------------------
November 30, Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 67,040,946 $1,489,587,942 24,347,440 $449,736,487
Shares issued
to shareholders
in reinvestment
of distributions 458,635 8,613,326 835,529 15,090,163
Shares reacquired (33,540,206) (753,773,091) (17,900,602) (330,771,689)
----------- -------------- ------------ -------------
Net increase 33,959,375 $ 744,428,177 7,282,367 $134,054,961
========== ============== ============ ============
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended November
30, 1995 was $31,555.
(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, 1995 is set forth below:
<TABLE>
<CAPTION>
Acquisitions Dispositions
Beginning -------------------------------- ------------------------------
Share/Par Share/Par Share/Par
Affiliate Amount Amount Cost Amount Cost
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amerihost Properties, Inc. 100,000 351,000 $ 1,676,067 -- $ --
Applebee's International,
Inc. 1,864,200 96,600 2,159,257 -- --
Autodesk, Inc. 1,555,000 1,386,770 51,453,012 47,000 1,207,148
Back Bay Restaurant Group,
Inc. 185,100 -- -- -- --
Buffets Inc. 1,350,100 217,900 1,995,943 -- --
CareLine, Inc. 728,700 -- -- 728,700 5,233,371
CareLine, Inc., 8s, 2001 1,500,000 -- -- 1,500,000 1,500,000
Compuware Corp. 565,100 1,634,424 45,863,405 -- --
Equalnet Holding Corp. -- 447,000 5,347,328 -- --
HFS Inc. 2,430,000 790,805 22,676,229 -- --
Hammons (John Q) Hotels,
Inc. 133,200 411,100 5,947,170 -- --
Hometown Buffet, Inc. 823,000 86,000 985,636 -- --
IHOP Corp. 65,000 547,200 12,430,327 -- --
Integrated Health Services,
Inc. 934,300 470,627 15,740,594 -- --
Marcam Corp. 596,800 -- -- 20,000 507,787
Micro Warehouse, Inc. 1,149,000 581,600 20,778,546 -- --
Mid Atlantic Medical
Services, Inc. 2,370,000 750,800 17,221,380 200 1,504
Mothers Work, Inc. 211,500 -- -- -- --
National Gaming Corp. 243,000 17,000 132,025 -- --
Quantum Restaurant Group,
Inc. 540,700 12,500 130,437 -- --
Showbiz Pizza Time, Inc. 750,000 5,000 48,125 -- --
System Software Assoc. 1,539,600 505,500 13,262,937 -- --
Taco Cabana, Inc. 968,295 -- -- 5,900 103,250
Transportation Corp. of
America, "B" 692,516 -- -- 152,516 440,469
------------ ----------
$217,848,418 $8,993,529
============ ==========
</TABLE>
Interest
Ending Realized and
Share/Par Gain Dividend Ending
Amount (Loss) Income Value
- ---------------------------------------------------------
451,000 $ -- $ -- $ 2,762,375
1,960,800 -- 94,525 54,412,200
2,894,770 1,026,489 471,332 102,040,642
185,100 -- -- 1,064,325
1,568,000 -- -- 20,776,000
-- -- -- --
-- 135,000 118,667 --
2,199,524 -- -- 45,090,242
447,000 -- -- 8,604,750
3,220,805 -- -- 223,040,746
544,300 -- -- 5,374,962
909,000 -- -- 9,885,375
612,200 -- -- 15,840,675
1,404,927 -- 19,020 31,084,010
576,800 (187,787) -- 9,877,700
1,730,600 -- -- 81,338,200
3,120,600 2,261 -- 76,064,625
211,500 -- -- 2,908,125
260,000 -- -- 2,567,500
553,200 -- -- 6,776,700
755,000 -- -- 9,626,250
2,045,100 -- 184,752 73,623,600
962,395 (53,837) -- 5,172,873
540,000 1,486,311 -- 6,885,000
---------- -------- ------------
$2,408,437 $888,296 $794,816,875
========== ======== ============
(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, 1995,
the Fund owned the following restricted securities (constituting 0.40% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). 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. Certain of these securities
may be offered and sold to "qualified institutional buyers" under Rule 144A of
the 1933 Act.
Dates of Share/Par
Description Acquisition Amount Cost Value
- ------------------------------------------------------------------------------
Boomtown, Inc. 10/23/92 - 5/25/93 35,000 $ 350,000 $ 218,750
Call Net
Enterprises, Inc.,
"B" 11/10/93 125,000 1,051,600 873,740
Copley Partners 1 12/06/86 3,000,000 751,263 761,724
Copley Partners 2 12/02/86 - 8/09/91 3,000,000 2,207,091 2,029,296
Highland Capital
Partners 6/28/88 - 6/28/93 7,500,000 2,561,094 8,320,425
Renal Treatment
Centers, Inc. 6/28/95 17,651 65,485 712,659
Turkiye Garanti
Bankasi 10/29/93 32,000 616,184 224,000
-----------
$13,140,594
===========
<PAGE>
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, 1995, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended November 30, 1995 and 1994, and the financial
highlights for each of the years in the nine-year period ended November 30,
1995. 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 as of
November 30, 1995 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, 1995, 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 5, 1996
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
-------------
MFS(R) EMERGING [LOGO: NUMBER 1 DALBAR BULK RATE
GROWTH FUND TOP RATED SERVICE] U.S. POSTAGE
PAID
PERMIT #55638
500 Boylston Street BOSTON, MA
Boston, MA 02116 -------------
[LOGO: M F S(R)
THE FIRST NAME IN MUTUAL FUNDS]
MEG-2 1/96/301M 7/207
<PAGE>
PROSPECTUS
April 1, 1996
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 .................................... 5
5. Investment Techniques ................................................ 6
6. Additional Risk Factors .............................................. 10
7. Management of the Fund ............................................... 13
8. Information Concerning Shares of the Fund ............................ 15
Purchases ......................................................... 15
Exchanges ......................................................... 18
Redemptions and Repurchases ....................................... 19
Distribution Plans ................................................ 21
Distributions ..................................................... 22
Tax Status ........................................................ 23
Net Asset Value ................................................... 23
Description of Shares, Voting Rights and Liabilities .............. 23
Performance Information ........................................... 24
9. Shareholder Services ................................................. 24
Appendix A ........................................................... A-1
Appendix B ........................................................... B-1
Appendix C ........................................................... C-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS CAPITAL GROWTH FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS Capital Growth Fund (the "Fund"), a diversified
series of MFS Series Trust II (the "Trust"), an open-end management investment
company consisting of four series. The Fund's investment objective is to provide
growth of capital. THE FUND IS INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE
WILLING TO ACCEPT THE RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL (see
"Investment Objective and Policies"). The minimum initial investment generally
is $1,000 per account (see "Information Concerning Shares of the Fund --
Purchases"). The Fund's investment adviser and distributor are Massachusetts
Financial Services Company ("MFS" or the "Adviser") and MFS Fund Distributors,
Inc. ("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
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 (the "SAI"), dated April 1, 1996,
as amended or supplemented from time to time, 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 SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
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(1) 4.00%
<CAPTION>
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<S> <C> <C>
Management Fees ........................................................ 0.75% 0.75%
Rule 12b-1 Fees ........................................................ 0.25%(2) 1.00%(3)
Other Expenses(4) ...................................................... 0.33% 0.39%
---- ----
Total Operating Expenses ............................................... 1.33% 2.14%
<FN>
- ----------
(1) 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 "Information Concerning Shares of
the Fund -- Purchases" below.
(2) 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. Payment of the 0.10% per annum Class A distribution
fee will commence on such date as the Trustees of the Trust may determine. Distribution expenses paid
under this Plan, together with the initial sales charge, may cause long-term shareholders to pay more
than the maximum sales charge that would have been permissible if imposed entirely as an initial sales
charge. See "Information Concerning Shares of the Fund -- Distribution Plans" below.
(3) 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 "Information Concerning Shares of
the Fund -- Distribution Plans" below). Distribution expenses paid under this Plan, together with any
CDSC, may cause long-term shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
(4) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount
of cash maintained by the Fund with its custodian and dividend disbursing agent, and may enter into
other such arrangements and directed brokerage arrangements (which would also have the effect of
reducing the Fund's expenses). Any such fee reductions are not reflected under "Other Expenses."
</FN>
<CAPTION>
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
------ ------- ------------------------------
<S> <C> <C> <C>
(1)
1 year ..................................................... $ 70 $ 62 $ 22
3 years .................................................... 97 97 67
5 years .................................................... 126 135 115
10 years .................................................... 208 227(2) 227(2)
<FN>
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after purchase; therefore, years nine
and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections: (i) varying sales charges on share purchases --
"Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management fees --
"Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan) fees --
"Distribution 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 objectives and policies. Shares of the Fund are continuously sold to
the public and the Fund then uses the proceeds to buy securities for its
portfolio. Two classes of shares of the Fund currently are offered to the
general public. Class A shares are offered at net asset value plus an initial
sales charge (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. 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 has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors given upon their authority, as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Class A and Class B shares
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1995 1994 1993<F1> 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .................... $13.49 $14.75 $14.58 $13.37 $14.72 $14.83
------ ------ ------ ------ ------ ------
Income from investment operations<F4> --
Net investment income<F7> ................................ $ 0.11 $ 0.21 $ 0.03 $ 0.01 $ 0.04 $ 0.03
Net realized and unrealized gain (loss) on investments ... 4.91 (0.25) 0.14 4.85 (0.23) 0.50
------ ------ ------ ------ ------ ------
Total from investment operations ....................... $ 5.02 $(0.04) $ 0.17 $ 4.86 $(0.19) $ 0.53
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ............................... $(0.22) $(0.06) $ -- $(0.05) $ --<F6> $(0.02)
From net realized gain on investments .................... (0.62) (1.16) -- (0.62) (1.16) (0.62)
------ ------ ------ ------ ------ ------
Total distributions declared to shareholders ........... $(0.84) $(1.22) $ -- $(0.67) $(1.16) $(0.64)
------ ------ ------ ------ ------ ------
Net asset value -- end of period .......................... $17.67 $13.49 $14.75 $17.56 $13.37 $14.72
====== ====== ====== ====== ====== ======
Total return<F5> .......................................... 39.51% (0.47)% 5.01%<F3> 38.16% (1.52%) 3.70%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA<F7>:
Expenses<F2> ............................................. 1.27% 1.12% 0.91%<F3> 2.14% 2.18% 2.15%
Net investment income .................................... 0.67% 1.59% 1.67%<F3> 0.08% 0.32% 0.10%
PORTFOLIO TURNOVER ........................................ 91% 50% 70% 91% 50% 70%
NET ASSETS AT END OF PERIOD (000 OMITTED) ................. $88,119 $2,608 $ 196 $428,445 $384,504 $454,089
<FN>
- ----------
<F1> For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
<F2> For periods ending after November 30, 1994, the Fund's expenses are calculated without reduction for fees paid indirectly.
<F3> Annualized.
<F4> Per share data for the periods subsequent to November 30, 1992 is 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.
<F7> The distributor did not impose a portion of its Class A distribution fee for the periods indicated.
If this fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $0.10 -- -- -- -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses<F2> 1.35% -- -- -- -- --
Net investment income 0.59% -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Class B
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1992 1991 1990 1989 1988 1987**
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .................... $13.27 $11.29 $12.05 $ 9.38 $ 7.59 $ 7.50
------ ------ ------ ------ ------ ------
Income from investment operations --
Net investment income .................................... $ 0.02 $ 0.10 $ 0.18 $ 0.17 $ 0.12 $ 0.04
Net realized and unrealized gain (loss) on investments ... 2.61 2.15 (0.75) 2.63 1.76 0.06
------ ------ ------ ------ ------ ------
Total from investment operations ....................... $ 2.63 $ 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 .................... (1.07) (0.13) -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions declared to shareholders ........... $(1.07) $(0.27) $(0.19) $(0.13) $(0.09) $(0.01)
------ ------ ------ ------ ------ ------
Net asset value -- end of period .......................... $14.83 $13.27 $11.29 $12.05 $ 9.38 $ 7.59
====== ====== ====== ====== ====== ======
Total return .............................................. 20.61% 20.22% (4.80)% 30.11% 24.79% 1.41%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ................................................. 2.24% 2.28% 2.38% 2.46% 2.17% 2.26%+
Net investment income .................................... 0.18% 0.75% 1.56% 1.56% 1.34% 0.36%+
PORTFOLIO TURNOVER ........................................ 65% 86% 68% 58% 93% 139%
NET ASSETS AT END OF PERIOD (000 OMITTED) ................. $436,561 $317,375 $226,245 $202,861 $130,961 $88,471
<FN>
- ----------
**For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
+Annualized.
</TABLE>
<PAGE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT 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.
INVESTMENT POLICIES -- 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 valuation 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
Service ("S&P") or Fitch Investors Service, Inc. ("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
Risk Factors -- Lower-Rated Fixed Income Securities" below for a further
description of the risks associated with investing in these securities.) For a
description of these ratings, see Appendix B to this Prospectus.
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.
The Fund may also invest up to 25% (and expects generally to invest between 0%
to 15%) of its total assets in foreign securities (not including American
Depositary Receipts ("ADRs")), which are not traded on U.S. exchanges. See
"Additional Risk Factors -- Foreign Securities" 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.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described more
fully in the SAI. See "Investment Techniques" in the SAI.
LENDING OF SECURITIES -- The Fund may make loans of its portfolio securities.
Such loans will usually be made only to member banks of the Federal Reserve
System and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would continue to collect the
equivalent of the interest on the securities loaned and would also receive
either interest (through investment of cash collateral) or a fee (if the
collateral is U.S. Government securities or a letter of credit).
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures which are intended
to minimize risk.
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 liquid and thus not subject to the Fund's limitation on investing
not more than 15% of its net assets in illiquid investments. The Board of
Trustees has adopted guidelines and delegated to 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 decreasing the level of liquidity 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.
INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of unusual market
conditions when the Adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Fund may be invested in cash 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 C to this Prospectus for a
description of U.S. Government obligations and certain short-term investments.
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.
LOANS AND OTHER DIRECT INDEBTEDNESS -- The Fund may invest a portion of its
assets in loans and other direct indebtedness. By purchasing a loan, the Fund
acquires some or all of the interest of a bank or other lending institution in a
loan to a corporate 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 loans 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. Loans 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 loans, other direct
indebtedness and the risks related to transactions therein, see the SAI.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction and
Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser determines whether an issuer's principal activities are located in an
emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
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 Foreign Securities" below).
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 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.
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 SAI, which should be read in conjunction with the following section. In
addition, the SAI contains a further discussion of the nature of the
transactions which may be entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call and put options
and purchase call and put options on securities. The Fund will write options on
securities for the purpose of increasing its return on such securities and/or to
protect the 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.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Investment Techniques" in the SAI.
FIXED INCOME SECURITIES: The net asset value of the shares of an open-end
investment company which may invest to a limited extent in fixed income
securities changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected to
rise. Conversely, when interest rates rise, the value of a fixed income
portfolio can be expected to decline.
Although changes in the value of securities subsequent to their acquisition are
reflected in the net asset value of shares of the Fund, such changes will not
affect the income received by the Fund from such securities. However, the
dividends paid by the Fund, if any, will increase or decrease in relation to the
income received by the Fund from its investments, which would in any case be
reduced by the Fund's expenses before it is distributed to shareholders. 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.
LOWER-RATED FIXED INCOME 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. 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.
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
SAI, which could increase the risks incurred by the Fund in entering into such
transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S. exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC") and on
foreign exchanges. The securities underlying options and Futures Contracts
traded by the Fund may include domestic as well as foreign securities. Investors
should recognize that transactions involving foreign securities or foreign
currencies, and transactions entered into in foreign countries, may involve
considerations and risks not typically associated with investing in U.S.
markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
For example, the Fund may sell Futures Contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the Futures
transaction will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction. The risks
related to transactions in options, Futures Contracts, Options on Futures
Contracts and Forward Contracts entered into by the Fund are set forth in
greater detail in the SAI, which should be reviewed in conjunction with the
foregoing discussion.
FOREIGN SECURITIES: 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.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or if the Fund has entered into a contract
to sell the security, in possible liability to the purchaser. Certain markets
may require payment for securities before delivery and in such markets the Fund
bears the risk that the securities will not be delivered and that the Fund's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
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.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
PORTFOLIO TRADING
The Fund intends to manage its portfolio by buying and selling securities 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 SAI.).
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD") and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of other investment company clients
of MFD, 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 SAI.
--------------------
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. 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. John F. Brennan, Jr., a Senior Vice
President of the Adviser, has been the Fund's portfolio manager since May 1,
1995. Mr. Brennan has been employed as a portfolio manager 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, 1995, MFS received management fees
under the Fund's Advisory Agreement of $3,363,454.
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 various 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 $43.9 billion on behalf of approximately 1.9 million investor
accounts as of February 29, 1996. As of such date, the MFS organization managed
approximately $1.2 billion of assets invested in equity securities and
approximately $20 billion of assets invested in fixed income securities.
Approximately $3.8 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott,
John D. McNeil and 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 also 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.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS will have access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial will have
access to the extensive U.S. equity investment expertise of MFS. One or more MFS
investment analysts are expected to work for an extended period with Foreign &
Colonial's portfolio managers and investment analysts at their offices in
London. In return, one or more Foreign & Colonial employees are expected to work
in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
<PAGE>
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer and other financial institutions ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
The Fund offers two classes of shares (Class A and B shares) which bear sales
charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
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** None** See Below**
<FN>
- ----------
*Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated using
the percentages above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In
the following two circumstances, Class A shares are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates 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.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
---------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
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%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee payable under the Fund's Class B Distribution Plan (see
"Distribution Plans" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of Class
B shares is 4% of the purchase price of the shares (commission rate of 3.75%
plus a service fee equal to 0.25% of the purchase price).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus.
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. See "Distribution Plans" below. However, for purposes of
conversion to Class A shares, all shares in a shareholder's account that were
purchased through the reinvestment of dividends and distributions paid in
respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bears to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
GENERAL: The following information applies to purchases of both classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject 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 shares 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.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A and Class B shares. In addition, from time to time, MFD may
pay dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, from time to time, MFD, at its expense, may provide
additional commissions, compensation or promotional incentives ("concessions")
to dealers which sell shares of the Fund. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives for such seminars or training programs, seminars for
the public, advertising and sales campaigns regarding one or more MFS Funds,
and/or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered representatives in
group meetings or to help pay the expenses of sales contests. Other concessions
may be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RETIREMENT PLAN ACCOUNTS. Following the termination of any agreement between
a plan sponsor and the Shareholder Servicing Agent or its affiliates with
respect to the MFS FUNDamental 401(k) Plan or another similar recordkeeping
system made available by the Shareholder Servicing Agent, the Shareholder
Servicing Agent shall combine all plan participant accounts into a single
omnibus or pooled account for each Fund in which the plan invests.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale).
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of an
MFS Fund to shares of any other MFS Fund, except with respect to exchanges from
an MFS money market fund to another MFS Fund which is not an MFS money market
fund (discussed below). With respect to an exchange involving shares subject to
a CDSC, the CDSC will be unaffected by the exchange and the holding period for
purposes of calculating the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
New York Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"),
the exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers. 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 -- General -- Right to Reject
Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225- 2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent
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.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of 12 months (in the
case of purchases of $1 million or more of Class A shares or purchases by
certain retirement plans of Class A shares) 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 business on December 31 of
that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares"). Therefore, at the time of redemption of a
particular class, (i) any Free Amount is not subject to the CDSC and (ii) the
amount of the redemption equal to the then-current value of Reinvested Shares is
not subject to the CDSC, but (iii) any amount of the redemption in excess of the
aggregate of the then-current value of Reinvested Shares and the Free Amount is
subject to a CDSC. The CDSC will first be applied against the amount of Direct
Purchases which will result in any such charge being imposed at the lowest
possible rate. The CDSC to be imposed upon redemptions of shares will be
calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for
certain Class A share purchases, a CDSC will be imposed upon redemption. Such
purchases under the Reinstatement Privilege are subject to all limitations in
the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. Subject to 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
securities (instead of cash) from the Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION 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
"Distribution Plans"), after having concluded that there is a reasonable
likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below have not yet been imposed or
are being waived. These circumstances are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A or Class B
shares, as appropriate) (the "Designated Class") annually in order that MFD may
pay expenses on behalf of the Fund relating to the servicing of shares of the
Designated Class. The service fee is used by MFD to compensate dealers which
enter into a sales agreement with MFD in consideration for all personal services
and/or account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is the
dealer or holder of record. MFD may from time to time reduce the amount of the
service fees paid for shares sold prior to a certain date. Service fees may be
reduced for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under each Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the separate Distribution Plans. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expense incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The Distribution Plans have substantially identical provisions with respect to
their operating policies and their initial approval, renewal, amendment and
termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant to
an initial sales charge, a substantial portion of which is paid to or retained
by the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets attributable
to Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more of Class A shares which are sold at net asset value but
which are subject to a 1% CDSC for one year after purchase). Distribution fee
payments under the Class A Distribution Plans may be used by MFD to pay
securities dealers a distribution fee in an amount equal on an annual basis to
0.25% per annum of each Fund's average daily net assets attributable to Class A
shares (other than Class A shares that have converted from Class B shares) owned
by investors for whom that securities dealer is the holder or dealer or record.
See "Purchases -- Class A Shares" above. In addition, to the extent that the
aggregate service and distribution fees paid under the Class A Distribution Plan
do not exceed 0.35% per annum of the average daily net assets of the Fund
attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class B
Shares" above. MFD will advance to dealers the first year service fee described
above at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefore, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to such
shares commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A and Class B
distribution and service fees for its current fiscal year are 0.25% and 1.00%
per annum, respectively. Payment of the 0.10% per annum Class A distribution fee
will commence on such date as the Trustees of the Trust may determine.
DISTRIBUTIONS
The 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 and Class C shares because expenses attributable to
Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), 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. Shortly after the end of each calendar year, each shareholder will
receive a statement setting forth the federal income tax status of all dividends
and distributions for 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.
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 at a rate of 31% on taxable dividends and redemption proceeds paid
to any shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments which have been subject to
30% withholding. Prospective investors should read the Fund's 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 SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value of each class of
shares is effective for orders received by the dealer prior to its calculation
and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of 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 SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above 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 SAI. For further
information about the Fund's performance for the fiscal year ended November 30,
1995, please see the Fund's Annual Report. A copy of the Annual Report may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number). In addition to information provided in
shareholder reports, the Fund may, in its discretion, from time to time, make a
list of all or a portion of its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
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 SAI) 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 (a bank collective investment fund) within a 13-month period
(or 36-month period for purchases of $1 million or more), the shareholder may
obtain such shares at the same reduced sales charge as though the total quantity
were invested in one lump sum, subject to escrow agreements and the appointment
of an attorney for redemptions from the escrow amount if the intended purchases
are not completed, by completing the Letter of Intent section of the Account
Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of 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
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 if
such fund is available for sale. 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 SAI for further information concerning
the Automatic Exchange Plan. Investors should consult their tax advisers for
information regarding the potential capital gain and loss consequences of
transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
--------------------
The Fund's SAI, dated April 1, 1996, 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
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares is waived (Section II), and
the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B shares, as applicable, is
waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any Fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life Assurance Company of Canada ("Sun Life")
or any of their subsidiary companies;
* Trustees and retired trustees of any investment company for which
MFD serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other financial
institution ("dealers") which have a sales agreement with MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
* Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of Plan participant;
* Loan from Plan (repayment of loans, however, will constitute new sales
for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section 1.401
(k)-1(d)(2), as amended from time to time);
* Termination of employment of Plan participant (excluding, however, a
partial or other termination of the Plan);
* Tax-free return of excess Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent; and
* Distributions from a Plan that has invested its assets in one or more
of the MFS Funds for more than 10 years from the later to occur of:
(i) January 1, 1993 or (ii) the date such Plan first invests its
assets in one or more of the MFS Funds. The sales charges will be
waived in the case of a redemption of all of the Plan's shares in all
MFS Funds (i.e., all the assets of the Plan invested in the MFS Funds
are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the Plan's assets in
the MFS Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares is waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" account or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party administrators,
or dealers have entered into an administrative services agreement with
MFD or one of its affiliates to perform certain administrative
services, subject to certain operational and minimum size requirements
specified from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old.
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the Plan participant,
as applicable, has attained the age of 70 1/2 years old, but only with
respect to the minimum distribution under applicable Internal Revenue
Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
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 SERVICE
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 C
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>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA02110
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) CAPITAL GROWTH FUND
500 Boylston Street
Boston, MA 02116
MCG-1-4/96/92M 3/203
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) Capital Growth Fund
Prospectus
April 1, 1996
<PAGE>
MFS(R) CAPITAL STATEMENT OF
GROWTH FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) April 1, 1996
- -------------------------------------------------------------------------
Page
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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 ........ 16
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 .... 23
11. Independent Auditors and Financial Statements ........... 23
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"), as amended or
supplemented from time to time, sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus, dated April 1, 1996. 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 of the Fund, dated April 1, 1996,
as amended or supplemented from time to time.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment techniques 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, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will usually not exceed five days). During the existence of a
loan, the Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation based on investment of cash collateral or a fee. The Fund would
not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of
an important vote to be taken among holders of the securities or of the giving
or withholding of their consent on a material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing, and when, in the judgment of the Adviser, the consideration
which could be earned currently from securities loans of this type justifies
the attendant risk. If the Adviser determines to make securities loans, it is
not intended that the value of the securities loaned would exceed 20% of the
value of the Fund's total assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have cash, short-term money market instruments or high
quality debt securities sufficient to cover any commitments or to limit any
potential risk. However, although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to 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.
LOANS AND OTHER DIRECT INDEBTEDNESS
As described in the Prospectus, the Fund may purchase loans and other direct
indebtedness. In purchasing a loan, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
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 loans 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 loans and other direct
indebtedness which the Fund will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower.
As the Fund may be required to rely upon another lending institution to
collect and pass 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
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. 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, loans 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 0% 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. Under the
terms of most sponsored arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depository of an unsponsored ADR, on
the other hand, is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass
through voting rights to ADR holders in respect of the deposited securities.
The Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the use
of the depository receipts in the 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
counterparty with which, the option is traded, and applicable laws and
regulations. If the writer's obligation is not so covered, it is subject to
the risk of the full change in value of the underlying security from the time
the option is written until exercise.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the 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
Commodities Futures Trading Commission ("CFTC") and the performance guarantee
of the exchange clearinghouse. In addition, Options on Futures Contracts may
be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract
and in the same principal amount as the call written where the exercise price
of the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or securities in a segregated
account with its custodian. The Fund may cover the writing of put Options on
Futures Contracts (a) through sales of the underlying Futures Contract, (b)
through segregation of cash, short-term money market instruments or high
quality debt securities in an amount equal to the value of the security or
index underlying the Futures Contract, or (c) through the holding of a put on
the same Futures Contract and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held
is less than the exercise price of the put written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality debt securities in a segregated account with its custodian. Put and
call Options on Futures Contracts may also be covered in such other manner as
may be in accordance with the rules of the exchange on which the option is
traded and applicable laws and regulations. Upon the exercise of a call Option
on a Futures Contract written by the Fund, the Fund will be required to sell
the underlying Futures Contract which, if the Fund has covered its obligation
through the purchase of such Contract, will serve to liquidate its futures
position. Similarly, where a put Option on a Futures Contract written by the
Fund is exercised, the Fund will be required to purchase the underlying
Futures Contract which, if the Fund has covered its obligation through the
sale of such Contract, will close out its futures position.
The writing of a call Option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing
of a put Option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and the changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline or changes in interest or
exchange rates, the Fund could, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease occurs, it may be offset,
in whole or part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Fund could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward foreign currency
exchange contracts ("Forward Contracts") for hedging 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 leveraging effect of such Futures Contract
is minimized.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following
procedure. Except as provided below, the Fund intends to write over-the-
counter options only with primary U.S. Government securities dealers
recognized as such by the Federal Reserve Bank of New York. Also, the
contracts the Fund has in place with such primary dealers provide that the
Fund has the absolute right to repurchase an option it writes at any time at a
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
generally is based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
the-money. The Fund will treat all or a portion of the formula as illiquid for
purposes of the SEC illiquidity ceiling test imposed by the SEC staff. The
Fund may also write over-the-counter options with non-primary dealers,
including foreign dealers (where applicable), and will treat the assets used
to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity 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 positive 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 deterioriates. Recent issuers
of indexed securities have included banks, corporations, and certain U.S.
government agencies.
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%. The Fund also may not invest more than 5% of the value of the
Fund's net assets, valued at the lower of cost or market, in warrants.
Included within such amount, but not to exceed 2% of the value of the Fund's
net assets, may be warrants which are not listed on the New York or American
Stock Exchange. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisers, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee
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
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act") of the Adviser, whose address is 500 Boylston
Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
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 and Mr. Bailey who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket
expenses. The Trust has adopted a retirement plan for non-interested Trustees
and Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 75
and if the Trustee has completed at least five years of service, he would be
entitled to annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 75
and receive reduced payments if he has completed at least five years of
service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Trust for
Messrs. Brodkin, Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current years service and amortize
past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable under the retirement plan.
As of February 29, 1996, the Trustees and officers, as a group, owned less
than 1% of the outstanding shares of the Fund.
As of February 29, 1996, First Interstate Bank, FBO Tesseract Corp., P.O. Box
1389, San Carlos, California 94070-7389, was the record owner of
approximately 5.15% of the outstanding Class A shares of the Fund, William
Clements Trust, Golden Eagle Distributors and Sales, Capital Accumulation and
PSRP. Master, P.O. Box 27506, Tucson, Arizona 85726-7506 was the record owner
of approximately 5.60% of the outstanding Class A shares of the Fund, and
Floyd Terry Taylor and Jerry Elaine Taylor, JTWROS, 201 Harrison Street,
Rainsville, Alabama 35986-9769, 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 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 September 1, 1993 (the "Advisory
Agreement"). The Adviser provides the Fund with overall investment advisory
and administrative services, as well as general office facilities. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For these services and facilities, the Adviser
receives 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, 1993, MFS, together with
Lifetime Advisers, Inc., a wholly owned subsidiary of MFS, 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. For the Fund's fiscal
year ended November 30, 1995, MFS received $3,363,454 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, 1995, 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,
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 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 Custodian also serves as the dividend and
distribution disbursing agent of the Fund. The Custodian has contracted with
the Adviser for the Adviser to perform certain accounting functions related to
options transactions for which the Adviser receives remuneration on a cost
basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Trust, dated as of September
10, 1986 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the
Fund. For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15% and up to 0.22% of assets
attributable to Class A and Class B shares, respectively. In addition, the
Shareholder Servicing Agent will be reimbursed by the Fund for certain
expenses incurred by the Shareholder Servicing Agent on behalf of the Fund.
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 Right of Accumulation or a Letter of Intent (see
"Investment and Withdrawal Programs" in this SAI). A group might qualify to
obtain quantity sales charge discounts (see "Investment and Withdrawal
Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain 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, 1995, MFD received sales charges of
$9,592 and dealers received sales charges of $80,955 (as their concession on
gross sales charges of $90,547) for selling Class A shares of the Fund; the
Fund received $5,428,186 representing the aggregate net asset value of such
shares.
During the fiscal years ended November 30, 1995 and 1994, the Contingent
Deferred Sales Charge ("CDSC") imposed on redemption of Class A shares was
approximately $1,900 and $42, respectively.
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, 1995, 1994 and 1993, the CDSC
imposed on redemption of Class B shares was approximately $472,200, $748,300
and $698,000 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
from time to time through such broker-dealer, on behalf of the Fund. The Trust's
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $23,100 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, 1995, the Fund paid total
brokerage commissions of $1,397,403 on total transactions (other than U.S.
Government securities, purchased options transactions and short-term
obligations) of $827,963,598.
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 $853,662.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or MFS or any subsidiary of MFS. Investment decisions for the Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, it is
believed that the Fund's ability to participate in volume transactions will
produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available 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 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 $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of the Fund, change the payee
or change the amount of each payment. The Shareholder Servicing Agent may
charge the account for services rendered and expenses incurred beyond those
normally assumed by the Fund with respect to the liquidation of shares. No
charge is currently assessed against the account, but one could be instituted
by the Shareholder Servicing Agent on 60 days' notice in writing to the
shareholder in the event that the Fund ceases to assume the cost of these
services. The Fund may terminate any SWP for an account if the value of the
account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP ) or an exchange of shares of the Fund for shares of another
MFS Fund. Any SWP may be terminated at any time by either the shareholder or
the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be
made at any time 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 ordinary income and any distributions
from net short-term capital gains (whether paid in cash or reinvested in
additional shares) are taxable to shareholders as ordinary income for federal
income tax purposes. A portion of 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 net long-term capital gains over net short-term capital losses),
whether paid in cash or reinvested in additional shares, are taxable to the
Fund's shareholders as long-term capital gains without regard to the length of
time the shareholders have held their shares. Any Fund dividend that is
declared in October, November, or December of any calendar year, that is
payable to shareholders of record in such a month, and that is paid the
following January will be treated as if received by the shareholders on
December 31 of the year in which the dividend is declared. The Fund will
notify shareholders regarding the federal tax status of its distributions
after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for
more than 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 disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within ninety days after their
purchase followed by any purchase (including purchases by exchange or by
reinvestment) without payment of an additional sales charge of Class A shares
of the Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. 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.
Investment income received by the Fund from foreign securities may be subject
to foreign income taxes withheld at the source; the Fund does not expect to be
able to pass through to shareholders foreign tax credits with respect to such
foreign taxes. The United States has entered into tax treaties with many
foreign countries that may entitle the Fund to a reduced rate of tax or an
exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is 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 rate may be permitted under an applicable
treaty. Any amounts overwithheld may be recovered by such persons by filing a
claim for refund with the U.S. Internal Revenue Service within the time period
appropriate to such claims. The Fund is also required in certain circumstances
to apply backup withholding of 31% on taxable dividends and redemption
proceeds paid to any shareholder (including a Non-U.S. Person) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be
applied to payments that have been subject to 30% withholding. Distributions
received from the Fund by Non-U.S. Persons may also be subject to tax under
the laws of their own jurisdictions.
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) 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, 1995 and for
the period from commencement of operations on December 29, 1986 to November
30, 1995 was 34.16%, 15.17% and 13.93%, respectively.
The average annual total rate of return for Class B shares, not giving effect
to the CDSC, for the one-year and five year periods ended November 30, 1995
and for the period from commencement of operations on December 29, 1986 to
November 30, 1995 was 38.16%, 15.39% and 13.93%, respectively.
The average annual total rate of return for Class A shares for the one-year
period ended November 30, 1995 and for the period from commencement of
operations on September 7, 1993 to November 30, 1995 was 31.52% and 13.41%
(including the effect of the sales charge) and 39.51% and 16.46% (without the
effect of the sales charge), 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, 1995. It has been assumed that dividend and capital gain
distributions were reinvested in additional shares. Any performance results or
total rate of return quotation provided by the Fund should not be considered
as representative of the performance of the Fund in the future since the net
asset value of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the Fund's portfolio, but
also on changes in the current value of such securities and on changes in the
expenses of the Fund. These factors and possible differences in the methods
used to calculate total rates of return should be considered when comparing
the total rate of return of the Fund to total rates of return published for
other investment companies or other investment vehicles. Total rate of return
reflects the performance of both principal and income. Current net asset value
and account balance information may be obtained by calling 1-800-MFS-TALK
(637-8255).
<TABLE>
<CAPTION>
MFS CAPITAL GROWTH FUND -- CLASS B
-------------------------------------------------------------
DIRECT CAP GAIN DIVIDEND TOTAL
YEAR ENDED INVESTMENT REINVESTMENT REINVESTMENT VALUE
- ---------- ---------- ------------ ------------ -----
<S> <C> <C> <C> <C>
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.......................................... 19,096 2,764 1,045 22,905
December 31, 1993.......................................... 18,386 3,984 1,546 23,916
December 31, 1994.......................................... 17,319 3,753 2,626 23,698
December 31, 1995.......................................... 20,786 8,300 3,962 33,048
<FN>
- ----------
*For the period from the start of business, December 29, 1986, through December 31, 1986
</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 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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the Fund; the Fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment
and evaluation of credit, interest rate, market and economic risks.
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(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity
with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-
yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first-closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market-
value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisors.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the
first trust to invest in companies deemed to be union-friendly by an
advisory board of senior labor officials, senior managers of companies
with significant labor contracts, academics and other national labor
leaders or experts.
9. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A and Class B
shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940 Act
and Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are 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 Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time);
or (ii) to any insurance company which has entered into an agreement with the
Fund and MFD that permits such insurance company to purchase Class A shares
from the Fund at their net asset value in connection with annuity agreements
issued in connection with the insurance company's separate accounts. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum
amount requirement from time to time. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under any Distribution Plan for which there is no dealer of record or for
which qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended November 30, 1995, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- ------------------ ------- ------ ----------
Class A Distribution Plan $ 65,517 $ 3,072 $ 62,445
Class B Distribution Plan $4,145,636 $3,205,822 $939,814
GENERAL: Each of the Distribution Plans 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 vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall
provide the Trustees, and the Trustees shall review, at least quarterly, a
written report of the amounts expended (and purposes therefor) under such
Plan. Each of the Distribution Plans may be terminated at any time by vote of
a majority of the Distribution Plan Qualified Trustees or by vote of the
holders of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions"). All agreements relating to any of the
Distributions Plans entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority
of the Distribution Plan Qualified Trustees. Agreements under any of the
Distribution Plans must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment of any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of the Fund's shares. None
of the Distribution Plans may be amended to increase materially the amount of
permitted distribution expenses without the approval of a majority of the
respective class of the Fund's shares (as defined in "Investment
Restrictions") or may be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans 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, as well as Class C shares for
one series. Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, shareholders of each class are entitled to share pro
rata in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
would participate equally in the earnings, dividends and assets allocable to
that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees in accordance with the provisions of Section 16(c) of the 1940 Act.
No material amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the Trust's shares. Shares have no pre-
emptive or conversion rights (except as described in "Purchases - Conversion
of Class B Shares" in the Prospectus). Shares are fully paid and non-
assessable. The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders
of two-thirds of the Trust's outstanding shares voting as a single class, or
of the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the affected
series' outstanding shares (as defined in "Investment Restrictions") will be
sufficient. The Trust or any series of the Trust may also be terminated (i)
upon liquidation and distribution of its assets, if approved by the vote of
the 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 AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance with tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
The Portfolio of Investments at November 30, 1995 the Statement of Assets and
Liabilities at November 30, 1995, the Statement of Operations for the year
ended November 30, 1995, the Statement of Changes in Net Assets for each of
the two years in the period ended November 30, 1995, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent auditors, as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,725 $ 685 10 $263,815
A. Keith Brodkin -0- -0- N/A -0-
Marshall N. Cohan 4,175 1,700 14 148,624
Dr. Lawrence Cohn 3,725 350 18 135,874
Sir David Gibbons 3,725 1,251 13 135,874
Abby M. O'Neill 3,500 491 10 129,499
Walter E. Robb, III 4,175 1,912 15 148,624
Arnold D. Scott -0- -0- N/A -0-
Jeffrey L. Shames -0- -0- N/A -0-
J. Dale Sherratt 4,175 395 20 148,624
Ward Smith 4,175 609 13 148,624
<FN>
(1) For fiscal year ended November 30, 1995.
(2) Based on normal retirement age of 75.
(3) Information provided is for calendar year 1995. All Trustees receiving compensation served as Trustees of 36 funds within
the MFS fund complex (having aggregate net assets at December 31, 1995, of approximately $12.5 billion) except Mr. Bailey,
who served as Trustee of 73 funds within the MFS fund complex (having aggregate net assets at December 31, 1995, of
approximately $31.7 billion).
</FN>
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
------------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,150 $473 $ 788 $1,103 $1,575
3,439 516 860 1,203 1,719
3,727 559 932 1,304 1,864
4,016 602 1,004 1,405 2,008
4,304 646 1,076 1,506 2,152
4,593 689 1,148 1,607 2,296
<FN>
(4) 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 AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
CAPITAL GROWTH
FUND
500 Boylston Street
Boston, MA 02116
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS MCG-13-4/96/500 3/203
<PAGE>
<PAGE>
[MFS LOGO] ANNUAL REPORT FOR
YEAR ENDED
NOVEMBER 30, 1995
MFS [Register Mark] CAPITAL GROWTH FUND
Front cover
A photo of a computer keyboard.
<PAGE>
MFS [Register Mark] CAPITAL GROWTH FUND
TRUSTEES
A. Keith Brodkin* -- Chairman and President
Richard B. Bailey* -- Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Marshall N. Cohan -- Private Investor
Lawrence H. Cohn, M.D. -- Chief of Cardiac Surgery, Brigham and Women's
Hospital; Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE -- Chief Executive Officer, Edmund Gibbons
Ltd.; Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill -- Private Investor; Director, Rockefeller Financial Services,
Inc. (investment adviser)
Walter E. Robb, III -- President and Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); President, Benchmark Consulting Group, Inc.
(office services); Trustee, Landmark Funds (mutual funds)
Arnold D. Scott* -- Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* -- President and Director, Massachusetts Financial Services
Company
J. Dale Sherratt -- President, Insight Resources, Inc. (acquisition planning
specialists)
Ward Smith -- Former Chairman (until 1994), NACCO Industries; Director,
Sundstrand Corporation
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
State Street Bank and Trust Company
AUDITORS
Deloitte & Touche LLP
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m. to
5 p.m. Eastern time (or leave a message anytime).
INVESTOR SERVICE MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from 8
a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576 any
business day from 9 a.m. to 5 p.m. Eastern time. (To use this service, your
phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
John F. Brennan, Jr.*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
TOP-RATED SERVICE
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The firm
achieved a 3.49 overall score -- on a scale of 1 to 4 -- in the 1995 survey. A
total of 71 firms responded, offering input on the quality of service they
receive from 36 mutual fund companies nationwide. The survey contained questions
about service quality in 17 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the past 12 months, Class A shares of the Fund provided a total return of
+39.51%, while Class B shares had a total return of +38.16%. Both of these
returns, which include the reinvestment of distributions but exclude the effects
of any sales charges, outperformed the Standard & Poor's 500 Composite Index
(the S&P 500), a popular, unmanaged index of common stock performance, which
returned +36.93% over the same period. A discussion of the Fund's performance
during this period may be found in the Portfolio Performance and Strategy
section of this letter.
Economic Outlook
Moderate, but sustainable, growth has been the hallmark of the economic
expansion's fifth year. While initial estimates showed the U.S. economy growing
at an annual rate of 4.2% in the third quarter, this surprisingly strong growth
was mainly driven by a pickup in consumer spending and an increase in business
and government outlays. Although impressive, this growth rate is not expected to
continue in coming months. Recent retail sales have been disappointing, in part
because of rising levels of consumer debt. An extended period of lower mortgage
rates seems to have relieved much of the pent-up demand for housing. Growth is
not expected to get much help from the manufacturing sector, either, as order
flows from manufacturers have moderated. Export activity, meanwhile, is also
expected to remain modest as continued weakness abroad has limited demand for
many U.S. goods. However, the Federal Reserve Board's consistent and, so far,
successful efforts to fight inflation seem to be giving consumers and businesses
enough longer term confidence to help maintain modest growth in real (adjusted
for inflation) gross domestic product into 1996.
Interest Rates
Given the recent signs of economic weakness, prospects for the Fed's further
decreasing short-term interest rates are good. Long-term rates, meanwhile, have
moved noticeably downward in recent months in anticipation of more modest
fourth-quarter growth with continued low inflation. While there were some
increases in commodity prices early in the year, companies found it difficult to
pass these on at the consumer level as they continue to fight for market share.
Additionally, unit labor costs remain under control and seem to be growing at a
pace that is near or below the ongoing inflation rate. Thus, with long-term
government bonds yielding approximately 6% in an environment of 2% to 3%
inflation, real rates of return in the fixed-income markets remain relatively
attractive.
1
<PAGE>
LETTER TO SHAREHOLDERS -- continued
Stock Markets
After some volatility late in the third quarter, the stock market continued to
strengthen. Although many companies reported solid third-quarter results, there
was some weakness in the earnings of retail, financial services and even some
technology companies. However, a slowdown in earnings may be a positive
development if it is an indication that the economy is not overheating and that
inflation is under control. While we see a deceleration of corporate earnings as
the inevitable consequence of traditional business cycles, we remain encouraged
by the high absolute level of profitability among U.S. companies. Also, many
companies' increasing emphasis on cost containment and growing use of technology
have helped keep them highly competitive and reasonably profitable. Looking
ahead, we believe that a stabilizing interest rate environment, coupled with
reasonable earnings reports, could justify current market valuations.
Portfolio Performance and Strategy
The Fund's strong performance over the past year relative to the S&P 500 can be
attributed to the following factors: underweightings in the energy, basic
materials, auto and housing sectors; overweighting in the financial services
sector; and stock selection, particularly in the industrial goods and consumer
staples sectors. An underweighting in the technology sector, which was among the
market's best performing sectors, helped offset part of this positive relative
performance.
The financial services sector, which averaged 23% of the Fund's assets
during the year, performed strongly, with a return of +54.8% versus +36.93% for
the S&P 500. The strength of this sector's performance was broadly based across
both insurance companies and banks. First Interstate Bancorp and West One
Bancorp were particuarly strong performers.
The industrial goods and consumer staples sectors also outperformed the
overall market; moreover, stock selection within these sectors added
significantly to performance. For example, Lockheed Martin and McDonnell Douglas
added to performance in the industrial goods sector, while Philip Morris and
PepsiCo made strong contributions in the consumer staples sector.
The Fund's exposure to the technology sector was limited for most of the
year at 5.5% of the portfolio, versus 9.5% for the S&P 500. With the strong
performance of this sector, which gained 49.3%, this underweighting was a
significant negative for performance relative to the S&P 500.
2
<PAGE>
LETTER TO SHAREHOLDERS -- continued
Our current outlook remains optimistic. The U.S. economic backdrop is
exceedingly positive, with the prospect of monetary easing by the Fed, low
inflation, a strong relative international trade position, and sustainable
economic growth. While we believe this economic backdrop should be rewarding for
equity investors, our enthusiasm is tempered by the exceptional performance of
the equity markets in 1995.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Photo of A. Keith Brodkin, [Photo of John F. Brennan, Jr.
Chairman and President] Portfolio Manager]
[Signature] [Signature]
A. Keith Brodkin John F. Brennan, Jr.
Chairman and President Portfolio Manager
December 13, 1995
PORTFOLIO MANAGER PROFILE
John Brennan has been a member of the MFS investment staff since 1985. A
graduate of the University of Rhode Island and Stanford University's Graduate
School of Business Administration, he began his career at MFS as an industry
specialist and was promoted to Assistant Vice President -- Investments in 1987.
He was named Vice President -- Investments in 1988 and Senior Vice President --
Investments in February 1995. Mr. Brennan became Portfolio Manager of MFS
Capital Growth Fund on May 1, 1995.
3
<PAGE>
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 generally invests in
companies believed to possess above-average growth opportunities. While the
policy of the Fund is to invest primarily in common stocks, it may also seek
appreciation in fixed-income securities, convertible bonds, convertible
preferred stocks and warrants. The Fund may also invest up to 25% of its total
assets in foreign securities.
TAX FORM SUMMARY
In January 1996, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
The Fund has designated $9,937,136 as a long-term capital gain distribution for
tax purposes. This distribution was made to shareholders of record as of
December 29, 1994, payable December 30, 1994.
For the year ended November 30, 1995, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations came to
61.78%.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Capital Growth Fund Class B shares in comparison to various market
indicators. Fund results in the graph do not reflect the deduction of any
contingent deferred sales charge (CDSC) since the CDSC is not applicable after a
six-year period. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. You cannot invest in an index. All results reflect the reinvestment
of all dividends and capital gains.
Please note that effective September 7, 1993, Class A shares were offered.
Information on Class A share performance appears on the next page.
4
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1987 to November 30, 1995)
Line graph representing the growth of a $10,000 investment for the nine-year
period ended November 30, 1995. The graph is scaled from $0 to $50,000 in
$10,000 segments. The years are marked in 12-month segments from 1987 to 1995.
There are three lines drawn to scale. One is a solid line representing
MFS Capital Growth Fund (Class B), a second line of short dashes represents
the S&P 500, a third line of medium-short dashes represents the Consumer Price
Index.
MFS Capital Growth Fund (Class B) $32,338
S&P 500 $33,034
Consumer Price Index $13,897
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
Life of Class
through
1 Year 3 Years 5 Years 11/30/95
===================================================================================================================
<S> <C> <C> <C> <C>
MFS Capital Growth Fund (Class A) including
5.75% sales charge +31.51% -- -- +13.41%*
- -------------------------------------------------------------------------------------------------------------------
MFS Capital Growth Fund (Class A) at net
asset value +39.51% -- -- +16.46%*
- -------------------------------------------------------------------------------------------------------------------
MFS Capital Growth Fund (Class B) with CDSC+ +34.16% +11.36% +15.17% +13.93%++
- -------------------------------------------------------------------------------------------------------------------
MFS Capital Growth Fund (Class B) without CDSC +38.16% +12.16% +15.39% +13.93%++
- -------------------------------------------------------------------------------------------------------------------
Average capital appreciation fund +30.28% +13.56% +17.38% +12.02%**
- -------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index +36.93% +15.05% +16.76% +14.34%**
- -------------------------------------------------------------------------------------------------------------------
Consumer Price Indexes + 2.61% + 2.65% + 2.80% + 3.76%**
- -------------------------------------------------------------------------------------------------------------------
<FN>
* For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1995.
+ These returns reflect the applicable Class B CDSC of 4%, 3% and 2% for the
1-, 3- and 5-year periods, respectively, and 0% for the period commencing
December 29, 1986.
++ For the period from the commencement of offering of Class B shares,
December 29, 1986 to November 30, 1995.
** Benchmark comparisons begin on January 1, 1987.
[ss] The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
5
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS -- continued
In the table on the preceding page, we have included the average annual total
returns of all capital appreciation funds (including the Fund) tracked by Lipper
Analytical Services, Inc. (an independent firm which rates mutual fund
performance) for the applicable time periods. Because these returns do not
reflect any applicable sales charges, we have also included the Fund's results
at net asset value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed, may
be worth more or less than their original cost. All Class A results reflect the
applicable expense subsidy which is explained in the Notes to Financial
Statements. Had the subsidy not been in effect, the results would have been less
favorable.
6
<PAGE>
PORTFOLIO OF INVESTMENTS -- November 30, 1995
Common Stocks -- 93.6%
================================================================================
Issuer Shares Value
- --------------------------------------------------------------------------------
Aerospace -- 7.1%
Allied Signal, Inc. 140,000 $ 6,615,000
Lockheed Martin Corp. 300,000 22,012,500
McDonnell Douglas Corp. 90,000 8,021,250
------------
$ 36,648,750
- --------------------------------------------------------------------------------
Agricultural Products -- 1.9%
AGCO Corp. 100,000 $ 4,312,500
Case Corp. 135,000 5,636,250
------------
$ 9,948,750
- --------------------------------------------------------------------------------
Airlines -- 0.8%
Southwest Airlines Co. 168,400 $ 4,210,000
- --------------------------------------------------------------------------------
Apparel and Textiles -- 1.1%
Nike, Inc., "B" 100,000 $ 5,800,000
- --------------------------------------------------------------------------------
Automotive -- 1.4%
General Motors Corp. 145,000 $ 7,032,500
- --------------------------------------------------------------------------------
Banks and Credit Companies -- 2.9%
First Interstate Bancorp 110,000 $ 14,740,000
- --------------------------------------------------------------------------------
Business Services -- 1.2%
ADT Ltd.* 425,000 $ 5,950,000
DST Systems, Inc.* 12,400 358,050
------------
$ 6,308,050
- --------------------------------------------------------------------------------
Cellular Telephones -- 0.7%
AirTouch Communications, Inc.* 117,500 $ 3,422,188
- --------------------------------------------------------------------------------
Computer Software -- Systems -- 4.2%
Adobe Systems, Inc. 147,800 $ 9,994,975
BMC Software, Inc.* 275,000 11,618,750
------------
$ 21,613,725
- --------------------------------------------------------------------------------
Consumer Goods and Services -- 11.6%
Colgate-Palmolive Co. 75,000 $ 5,493,750
Gillette Co. 160,000 8,300,000
Philip Morris Cos., Inc. 180,000 15,795,000
RJR Nabisco Holdings Corp. 281,000 8,184,125
Tyco International Ltd. 700,000 21,962,500
------------
$ 59,735,375
- --------------------------------------------------------------------------------
Containers -- 0.6%
Corning, Inc. 100,000 $ 3,012,500
- --------------------------------------------------------------------------------
Defense Electronics -- 1.8%
Loral Corp. 280,000 $ 9,485,000
- --------------------------------------------------------------------------------
Electrical Equipment -- 1.9%
Honeywell, Inc. 200,000 $ 9,525,000
- --------------------------------------------------------------------------------
Electronics -- 2.3%
Intel Corp. 198,300 $ 12,071,513
- --------------------------------------------------------------------------------
Entertainment -- 5.2%
Disney (Walt) Co. 75,000 $ 4,509,375
Harrah's Entertainment, Inc.* 897,200 22,317,850
------------
$ 26,827,225
- --------------------------------------------------------------------------------
7
<PAGE>
PORTFOLIO OF INVESTMENTS -- continued
Common Stocks -- continued
================================================================================
Issuer Shares Value
- --------------------------------------------------------------------------------
Financial Institutions -- 7.4%
Federal Home Loan Mortgage Corp. 286,500 $ 22,060,500
State Street Boston Corp. 200,000 9,000,000
Student Loan Marketing Assn 100,000 7,012,500
------------
$ 38,073,000
- --------------------------------------------------------------------------------
Food and Beverage Products -- 1.7%
PepsiCo, Inc. 160,000 $ 8,840,000
- --------------------------------------------------------------------------------
Foreign Stocks -- 7.1%
Australia -- 0.7%
Sydney Harbour Casino Holdings Ltd., Pfd.
(Entertainment) 2,500,000 $ 3,360,717
- --------------------------------------------------------------------------------
Canada -- 1.8%
Potash Corp. of Saskatchewan, Inc.
(Precious Metals and Minerals) 75,200 $ 5,198,200
Rogers Communications, Inc.
(Telecommunications) 400,000 4,193,955
------------
$ 9,392,155
- --------------------------------------------------------------------------------
Italy -- 1.9%
Olivetti Group, S.P.A. (Office Equipment) 6,500,000 $ 4,311,639
Telecom Italia (Telecommunications) 4,371,000 4,267,059
Telecom Italia (Telecommunications) 849,000 1,370,726
------------
$ 9,949,424
- --------------------------------------------------------------------------------
Malaysia -- 1.0%
New Straits Times Press, BHD (Publishing) 1,572,000 $ 5,235,867
- --------------------------------------------------------------------------------
Sweden -- 0.9%
Astra AB, "B" (Pharmaceuticals) 100,000 $ 3,676,695
Hennes & Mauritz (Retail) 12,700 789,536
------------
$ 4,466,231
- --------------------------------------------------------------------------------
United Kingdom -- 0.8%
PowerGen PLC, ADR (Electricity) 1,300,000 $ 4,381,517
- --------------------------------------------------------------------------------
Total Foreign Stocks $36,785,911
- --------------------------------------------------------------------------------
Forest and Paper Products -- 3.4%
Fort Howard Corp.* 576,700 $ 11,461,913
Kimberly Clark Corp. 80,000 6,150,000
------------
$ 17,611,913
- --------------------------------------------------------------------------------
Insurance -- 7.3%
AFLAC, Inc. 120,000 $ 4,890,000
American Re Corp. 120,000 4,950,000
MBIA, Inc. 70,000 5,390,000
Progressive -- Ohio 170,000 7,565,000
Prudential Reinsurance Holdings, Inc. 433,400 9,047,225
Torchmark Corp. 140,000 5,950,000
------------
$ 37,792,225
- --------------------------------------------------------------------------------
Machinery -- 1.2%
Ingersoll Rand Co. 125,000 $ 4,796,875
York International Corp. 31,700 1,418,575
------------
$ 6,215,450
- --------------------------------------------------------------------------------
Medical and Health Products -- 1.0%
Johnson & Johnson 60,000 $ 5,197,500
- --------------------------------------------------------------------------------
8
<PAGE>
PORTFOLIO OF INVESTMENTS -- continued
================================================================================
Issuer Shares Value
- --------------------------------------------------------------------------------
Medical and Health Technology and Services -- 3.5%
Beverly Enterprises* 320,000 $ 3,720,000
Genesis Health Ventures, Inc.* 139,300 4,544,663
Pacificare Health Systems, Inc., "B"* 112,000 9,716,000
------------
$ 17,980,663
- --------------------------------------------------------------------------------
Metals and Minerals -- 0.8%
Phelps Dodge Corp. 60,000 $ 4,072,500
- --------------------------------------------------------------------------------
Oil -- 3.5%
Amoco Corp. 100,000 $ 6,775,000
Mobil Corp. 60,000 6,262,500
Union Pacific Resources Group, Inc.* 225,800 5,249,850
------------
$ 18,287,350
- --------------------------------------------------------------------------------
Photographic Products -- 1.5%
Eastman Kodak Co. 110,000 $ 7,480,000
- --------------------------------------------------------------------------------
Railroads -- 2.9%
Canadian National Railway Co.* 11,900 $ 178,500
Illinois Central Corp. 190,000 7,695,000
Norfolk Southern Corp. 90,000 7,087,500
------------
$ 14,961,000
- --------------------------------------------------------------------------------
Restaurants and Lodging -- 3.0%
Promus Hotel Corp.* 707,150 $ 15,645,694
- --------------------------------------------------------------------------------
Special Products and Services -- 1.1%
Stanley Works 115,000 $ 5,821,875
- --------------------------------------------------------------------------------
Stores -- 1.7%
Federated Department Stores, Inc.* 300,000 $ 8,737,500
- --------------------------------------------------------------------------------
Telecommunications -- 0.8%
Cabletron Systems, Inc.* 48,600 $ 4,033,800
- --------------------------------------------------------------------------------
Utilities -- Telephone -- 1.0%
MCI Communications Corp. 200,000 $ 5,350,000
- --------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $380,037,620) $483,266,956
- --------------------------------------------------------------------------------
Short-Term Obligations -- 6.2%
================================================================================
Principal Amount
(000 Omitted)
- --------------------------------------------------------------------------------
Federal Farm Credit Bank, due 12/08/95 $ 8,460 $ 8,450,624
Federal Home Loan Mortgage Corp.,
due 12/05/95 6,350 6,345,978
Federal National Mortgage Assn.,
due 12/13/95 8,020 8,004,842
Melville Corp., due 12/01/95 4,480 4,480,000
Raytheon Co., due 12/11/95 5,000 4,992,056
------------
$ 32,273,500
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $412,311,120) $515,540,456
Other Assets, Less Liabilities -- 0.2% 1,022,703
- --------------------------------------------------------------------------------
Net Assets -- 100.0% $516,563,159
================================================================================
*Non-income producing security.
See notes to financial statements
9
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
================================================================================
November 30, 1995
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $412,311,120) $515,540,456
Cash 3,657
Receivable for investments sold 220,514
Receivable for Fund shares sold 3,706,392
Dividends and interest receivable 902,916
Other assets 13,005
------------
Total assets $520,386,940
============
Liabilities:
Payable for investments purchased $ 2,559,976
Payable for Fund shares reacquired 756,299
Payable to affiliates -
Management fee 10,541
Shareholder servicing agent fee 2,923
Distribution fee 221,828
Accrued expenses and other liabilities 272,214
------------
Total liabilities $ 3,823,781
------------
Net assets $516,563,159
------------
Net assets consist of:
Paid-in capital $338,446,198
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 103,227,947
Accumulated undistributed net realized gain on investments
and foreign currency transactions 74,588,788
Accumulated undistributed net investment income 300,226
------------
Total $516,563,159
============
Shares of beneficial interest outstanding 29,381,465
============
Class A shares:
Net asset value and redemption price per share
(net assets of $88,118,595 / 4,987,749 shares of
beneficial interest outstanding) $17.67
======
Offering price per share (100/94.25) $18.75
======
Class B shares:
Net asset value and offering price per share
(net assets of $428,444,564 / 24,393,716 shares of
beneficial interest outstanding) $17.56
======
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
10
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
================================================================================
Year Ended November 30, 1995
- --------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 8,938,158
Interest 890,614
------------
Total investment income $ 9,828,772
------------
Expenses -
Management fee $ 3,363,454
Trustees' compensation 42,863
Shareholder servicing agent fee (Class A) 50,845
Shareholder servicing agent fee (Class B) 912,040
Distribution and service fee (Class A) 91,991
Distribution and service fee (Class B) 4,145,636
Custodian fee 207,360
Postage 91,138
Printing 75,427
Auditing fees 39,250
Legal fees 3,915
Miscellaneous 322,900
------------
Total expenses $ 9,346,819
Fees paid indirectly (32,195)
Reduction of expenses by distributor (26,474)
------------
Net expenses $ 9,288,150
------------
Net investment income $ 540,622
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 74,843,999
Foreign currency transactions 4,999
------------
Net realized gain on investments and
foreign currency transactions $ 74,848,998
------------
Change in unrealized appreciation (depreciation) -
Investments $ 70,043,293
Translation of assets and liabilities in foreign currencies (1,389)
------------
Net unrealized gain on investments and foreign
currency translation $ 70,041,904
------------
Net realized and unrealized gain on
investments and foreign currency $144,890,902
------------
Increase in net assets from operations $145,431,524
============
See notes to financial statements
11
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
================================================================================
Year Ended November 30, 1995 1994
- --------------------------------------------------------------------------------
Increase in net assets:
From operations -
Net investment income $ 540,622 $ 1,393,864
Net realized gain on investments and
foreign currency transactions 74,848,998 17,833,858
Net unrealized gain (loss) on investments
and foreign currency translation 70,041,904 (23,927,833)
------------ ------------
Increase (decrease) in net assets
from operations $145,431,524 $ (4,700,111)
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (43,087) $ (961)
From net investment income (Class B) (1,541,960) (95,487)
From net realized gain on investments and
foreign currency transactions (Class A) (120,843) (19,561)
From net realized gain on investments and
foreign currency transactions (Class B) (17,999,182) (35,570,518)
------------ ------------
Total distributions declared to shareholders $(19,705,072) $(35,686,527)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $162,346,739 $ 66,138,962
Net asset value of shares issued to shareholders
in reinvestment of distributions 18,312,867 33,058,598
Cost of shares reacquired (176,934,987) (125,984,050)
------------ ------------
Increase (decrease) in net assets from Fund
share transactions $ 3,724,619 $(26,786,490)
------------ ------------
Total increase (decrease) in net assets $129,451,071 $(67,173,128)
Net assets:
At beginning of period 387,112,088 454,285,216
------------ ------------
At end of period (including accumulated
undistributed net investment income of
$300,226 and $1,339,652, respectively) $516,563,159 $387,112,088
============ ============
See notes to financial statements
12
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Year Ended November 30, 1995 1994 1993* 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 13.49 $ 14.75 $ 14.58 $ 13.37 $ 14.72 $ 14.83
------- ------- ------- ------- ------- -------
Income from investment operations++ -
Net investment income [ss] $ 0.11 $ 0.21 $ 0.03 $ 0.01 $ 0.04 $ 0.03
Net realized and unrealized gain
(loss) on investments 4.91 (0.25) 0.14 4.85 (0.23) 0.50
------- ------- ------- ------- ------- -------
Total from investment
operations $ 5.02 $ (0.04) $ 0.17 $ 4.86 $ (0.19) $ 0.53
------- ------- ------- ------- ------- -------
Less distributions declared to
shareholders -
From net investment income $ (0.22) $ (0.06) $ -- $ (0.05) $ -- # $ (0.02)
From net realized gain on
investments (0.62) (1.16) -- (0.62) (1.16) (0.62)
------- ------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.84) $ (1.22) $ -- $ (0.67) $ (1.16) $ (0.64)
------- ------- ------- ------- ------- -------
Net asset value -- end of period $ 17.67 $ 13.49 $ 14.75 $ 17.56 $ 13.37 $ 14.72
======= ======= ======= ======= ======= =======
Total return++ 39.51% (0.47)% 5.01%+ 38.16 (1.52%) 3.70%
Ratios (to average net assets)/Supplemental data[ss]:
Expenses## 1.27% 1.12% 0.91%+ 2.14% 2.18% 2.15%
Net investment income 0.67% 1.59% 1.67%+ 0.08% 0.32% 0.10%
Portfolio turnover 91% 50% 70% 91% 50% 70%
Net assets at end of period (000 omitted) $88,119 $ 2,608 $ 196 $428,445 $384,504 $454,089
<FN>
* For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
## For periods ending after November 30, 1994, the Fund's expenses are calculated without reduction for fees paid indirectly.
+ Annualized.
+++ Per share data for the periods subsequent to November 30, 1992 is based on average shares outstanding.
++ 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.
# The per share distribution from net investment income on Class B shares was $0.00312 per share.
[ss] The distributor did not impose a portion of its Class A distribution fee for the periods indicated.
If this fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.10 -- -- -- -- --
Ratios (to average net assets):
Expenses## 1.35% -- -- -- -- --
Net investment income 0.59% -- -- -- -- --
</FN>
</TABLE>
See notes to financial statements
13
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights -- continued
====================================================================================================================================
Year Ended November 30, 1992 1991 1990 1989 1988 1987**
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period $ 13.27 $ 11.29 $ 12.05 $ 9.38 $ 7.59 $ 7.50
------- ------- ------- -------- -------- --------
Income from investment operations -
Net investment income $ 0.02 $ 0.10 $ 0.18 $ 0.17 $ 0.12 $ 0.04
Net realized and unrealized gain
(loss) on investments 2.61 2.15 (0.75) 2.63 1.76 0.06
------- ------- ------- -------- -------- --------
Total from investment
operations $ 2.63 $ 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 (1.07) (0.13) -- -- -- --
------- ------- ------- -------- -------- --------
Total distributions declared to
shareholders $ (1.07) $ (0.27) $(0.19) $ (0.13) $ (0.09) $ (0.01)
------- ------- ------- -------- -------- --------
Net asset value -- end of period $ 14.83 $ 13.27 $ 11.29 $ 12.05 $ 9.38 $ 7.59
======= ======= ======= ======== ======== ========
Total return 20.61% 20.22% (4.80)% 30.11% 24.79% 1.41%+
Ratios (to average daily net assets)/Supplemental data:
Expenses 2.24% 2.28% 2.38% 2.46% 2.17% 2.26%+
Net investment income 0.18% 0.75% 1.56% 1.56% 1.34% 0.36%+
Portfolio turnover 65% 86% 68% 58% 93% 139%
Net assets at end of period (000 omitted) $436,561 $317,375 $226,245 $202,861 $130,961 $ 88,471
<FN>
** For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
+ Annualized.
</FN>
</TABLE>
See notes to financial statements
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Capital 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. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Securities for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Foreign Currency Translation -- Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments 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 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.
Forward Foreign Currency Exchange Contracts -- The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Fund may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
It may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Fund may enter into
contracts with the intent of changing the
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
relative exposure of the Fund's portfolio of securities to different currencies
to take advantage of anticipated changes. The forward foreign currency exchange
contracts are adjusted by the daily exchange rate of the underlying currency and
any gains or losses are recorded for financial statement purposes as unrealized
until the contract settlement date.
Investment Transactions and Income -- Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex- dividend date for dividends received in
cash. Dividend payments received in additional securities are recorded on the
ex-dividend date in an amount equal to the value of the security on such date.
Fees Paid Indirectly -- The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions -- The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return, and consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a 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, 1995, $4,999 was reclassified from
accumulated net realized gain on investments to accumulated undistributed net
investment income, due to differences between book and tax accounting for
currency transactions. This change had no effect on the net assets or net asset
value per share.
16
<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, 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, 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 is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $8,988 for the year ended
November 30, 1995. Distributor -- MFD, a wholly owned subsidiary of MFS, as
distributor, received $9,592 for the year ended November 30, 1995, as its
portion of the sales charge on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer, which amounted to $3,072 for the year
ended November 30, 1995. MFD is not imposing the 0.10% distribution fee for an
indefinite period. Fees incurred under the distribution plan during the year
ended November 30, 1995, were 0.19% of average daily net assets attributable to
Class A shares on an annualized basis. Payments under the distribution plan
commenced on July 14, 1995 when the net assets of the Fund attributable to Class
A shares first equaled or exceeded $40 million.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- continued
The Class B distribution plan provides that the Fund will pay MFD a distribution
fee, of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. MFD will pay to
securities dealers that enter into a sales agreement with MFD all or a portion
of the service fee attributable to Class B shares. The service fee is intended
to be additional consideration for services rendered by the dealer with respect
to Class B shares. MFD retains the service fee for accounts not attributable to
a securities dealer, which amounted to $96,595 for Class B shares for the year
ended November 30, 1995. Fees incurred under the distribution plan during the
year ended November 30, 1995 were 1.00% of average daily net assets attributable
to Class B shares on an annualized basis.
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
shareholder 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 shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended November 30, 1995 were $1,900 and $472,213
for Class A and Class B shares, respectively.
Shareholder Servicing Agent -- MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of share 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
$395,341,131 and $435,271,737, 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 $ 412,311,120
=============
Gross unrealized appreciation $ 108,484,636
Gross unrealized depreciation (5,255,300)
-------------
Net unrealized appreciation $ 103,229,336
=============
18
<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:
<TABLE>
<CAPTION>
Class A Shares 1995 1994
---------------------------- -----------------------------
Year Ended November 30, Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Shares sold 5,253,774 $ 82,156,749 231,629 $ 3,234,603
Shares issued to shareholders in
reinvestment of distributions 12,226 158,371 1,363 18,815
Shares reacquired (471,616) (7,482,670) (52,922) (732,165)
------------ ------------ ------------ ------------
Net increase 4,794,384 $ 74,832,450 180,070 $ 2,521,253
=========== ============ ============ ============
Class B Shares 1995 1994
---------------------------- -----------------------------
Year Ended November 30, Shares Amount Shares Amount
================================================================================================
Shares sold 5,400,613 $ 80,189,990 4,507,115 $ 62,904,359
Shares issued to shareholders in
reinvestment of distributions 1,397,497 18,154,496 2,390,715 33,039,783
Shares reacquired (11,169,472) (169,452,317) (8,988,227) (125,251,885)
------------ ------------ ------------ -------------
Net decrease (4,371,362) $(71,107,831) (2,090,397) $ 29,307,743)
=========== ============ ============ =============
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended November
30, 1995 was $6,216.
19
<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, 1995, the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended November 30, 1995 and 1994, and the financial highlights for
each of the years in the nine-year period ended November 30, 1995. 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, 1995 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 out 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, 1995, 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 6, 1996
------------------------------------------------------------
This report is prepared for the general infomation of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
20
<PAGE>
THE MFS FAMILY OF FUNDS [Register Mark]
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
STOCK
================================================================================
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Capital Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] OTC Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Research Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Value Fund
- --------------------------------------------------------------------------------
STOCK AND BOND
================================================================================
MFS [Registration Mark] Total Return Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Utilities Fund
- --------------------------------------------------------------------------------
BOND
================================================================================
MFS [Registration Mark] Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Mortgage Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Securities Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] High Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Intermediate Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Strategic Income Fund
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND
================================================================================
MFS [Registration Mark] Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
WORLD
================================================================================
MFS [Registration Mark]/Foreign & Colonial Emerging Market Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark]/Foreign & Colonial International Growth and Income Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Asset Allocation Fund[SM]
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Equity Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Governments Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Growth Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] World Total Return Fund
- --------------------------------------------------------------------------------
NATIONAL TAX-FREE BOND
================================================================================
MFS [Registration Mark] Municipal Bond Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal High Income Fund
(closed to new investors)
- --------------------------------------------------------------------------------
MFS [Registration Mark] Municipal Income Fund
- --------------------------------------------------------------------------------
STATE TAX-FREE BOND
================================================================================
Alabama, Arkansas, California, Florida, Georgia, Louisiana, Maryland,
Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
- --------------------------------------------------------------------------------
MONEY MARKET
================================================================================
MFS [Registration Mark] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [Registration Mark] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [Registration] Mark Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
MFS [Registration Mark] CAPITAL [DALBAR LOGO] BULK RATE
GROWTH FUND U.S. POSTAGE
P A I D
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
[MFS LOGO]
MCG-2 1/96/50M 3/203
<PAGE>
PROSPECTUS
April 1, 1996
Class A Shares of Beneficial
MFS(R) GOLD & NATURAL Interest
RESOURCES FUND Class B Shares of Beneficial
(A member of the MFS Family of Funds(R)) Interest
- --------------------------------------------------------------------------------
Page
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1. Expense Summary ................................................ 2
2. The Fund ....................................................... 3
3. Condensed Financial Information ................................ 4
4. Investment Objective and Policies .............................. 5
5. Investment Techniques .......................................... 6
6. Additional Risk Factors ........................................ 10
7. Management of the Fund ......................................... 12
8. Information Concerning Shares of the Fund ...................... 13
Purchases ................................................... 13
Exchanges ................................................... 16
Redemptions and Repurchases ................................. 17
Distribution Plans .......................................... 19
Distributions ............................................... 20
Tax Status .................................................. 21
Net Asset Value ............................................. 21
Description of Shares, Voting Rights and Liabilities ........ 21
Performance Information ..................................... 22
9. Shareholder Services ........................................... 22
Appendix A ..................................................... A-1
Appendix B ..................................................... B-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS GOLD & NATURAL RESOURCES FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS Gold & Natural Resources Fund (the "Fund"), a
non-diversified series of MFS Series Trust II (the "Trust"), an open-end
management investment company. The Fund's investment objective is to provide
long-term capital appreciation and preservation of capital. BECAUSE OF THE
POLICY OF THE FUND OF INVESTING TO A SIGNIFICANT EXTENT IN FOREIGN SECURITIES,
AN INVESTMENT IN THIS FUND MAY BE SUBJECT TO A GREATER DEGREE OF RISK THAN AN
INVESTMENT IN OTHER INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN DOMESTIC
SECURITIES. BECAUSE THE PROFITS OF THE COMPANIES IN WHICH THE FUND INTENDS TO
INVEST ARE DIRECTLY AFFECTED BY THE PRICE OF GOLD AND OTHER NATURAL RESOURCES,
AN INVESTMENT IN THE FUND MAY BE SUBJECT TO PARTICULAR VOLATILITY (see
"Investment Objective and Policies"). The minimum initial investment generally
is $1,000 per account (see "Information Concerning Shares of the Fund --
Purchases"). The Fund's investment adviser and distributor are Massachusetts
Financial Services Company ("MFS" or the "Adviser") and MFS Fund Distributors,
Inc. ("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
Fund that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information (the "SAI"), dated April 1, 1996,
as amended or supplemented from time to time, which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 24 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares (as a
percentage of offering price) ........................................ 5.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) ................ See Below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after applicable fee reduction)(2) .................... 0.54% 0.54%
Rule 12b-1 Fees ........................................................ 0.00%(3) 1.00%(4)
Other Expenses(6) ...................................................... 0.89% 0.96%
----- -----
Total Operating Expenses (after applicable fee reduction)(5) ........... 1.43% 2.50%
- ----------
(1) 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 "Information
Concerning Shares of the Fund -- Purchases" below).
(2) The Advisor has voluntarily agreed to reduce its management fee to the
extent necessary to maintain "Total Operating Expenses" for each class of
shares of the Fund at a level equal to 1.43% and 2.50% per annum,
respectively. Absent this expense arrangement, management fees would have
been 0.75% per annum of net assets attributable to Class A and Class B
shares.
(3) 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.
Payment of the 0.25% per annum Class A service fee will commence on the
date that net assets attributable to Class A shares first equals or exceed
$40 million. See "Information Concerning Shares of the Fund --
Distribution Plans" below. Payment of the 0.10% per annum Class A
distribution fee will commence on such date as the Trustees of the Trust
may determine (see "Information Concerning Shares of the Fund --
Distribution Plans" below). Distribution expenses paid under this Plan,
together with the initial sales charge, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge.
(4) 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
"Information Concerning Shares of the Fund -- Distribution Plans" below).
Distribution expenses paid under this Plan, together with any CDSC, may
cause long-term shareholders to pay more than the maximum sales charge
that would have been permissible if imposed entirely as an initial sales
charge.
(5) Absent any expense reductions, "Total Operating Expenses" would have been
1.64% and 2.71% per annum for Class A and Class B shares, respectively.
(6) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
</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 ...................... $ 71 $ 65 $ 25
3 years ...................... 100 108 78
5 years ...................... 131 153 133
10 years ...................... 219 257(2) 257(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 objectives and policies. Shares of the Fund are
continuously sold to the public and the Fund then uses the proceeds to buy
securities for its portfolio. Two classes of shares of the Fund currently are
offered to the general public. Class A shares are offered at net asset value
plus an initial sales charge (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. 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 has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the
Fund's independent auditors given upon their authority, as experts in
accounting and auditing. The Fund's current independent auditors are Deloitte
& Touche LLP.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CLASS A AND CLASS B SHARES
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------------------------------
CLASS A CLASS B
--------------------------------------------------------------------------------------------------------
1995 1994 1993<F1> 1995 1994 1993
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A
SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value --
beginning of
period ........... $ 5.76 $ 6.54 $ 5.55 $ 5.68 $ 6.53 $ 4.67
------ ------ ------ ------ ------ ------
Income from investment
operations<F5> --
Net investment
income (loss)<F6> $ 0.01 $ 0.01 $ 0.01 $(0.04) $(0.06) $(0.02)
Net realized and
unrealized gain
(loss) on
investments .... (0.18) (0.73) 0.98 (0.18) (0.73) 1.88
------ ------ ------ ------ ------ ------
Total from
investment
operations . $(0.17) $(0.72) $ 0.99 $(0.22) $(0.79) $ 1.86
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net realized
gain on investments $ -- $(0.05) $ -- $ -- $(0.05) $ --
Tax return of
capital ........ -- (0.01) -- -- (0.01) --
------ ------ ------ ------ ------ ------
Total
distributions
declared to
shareholders $ -- $(0.06) $ -- $ -- $(0.06) $ --
------ ------ ------ ------ ------ ------
Net asset value --
end of period .... $ 5.59 $ 5.76 $ 6.54 $ 5.46 $ 5.68 $ 6.53
====== ====== ====== ====== ====== ======
Total return<F4>.... (2.95)% (11.14)% 17.84%<F3> (3.87)% (12.24)% 39.83%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL
DATA<F6>:
Expenses ......... 1.43% 1.42% 1.43%<F2> 2.50% 2.49% 2.66%
Net investment
income (loss) .. 0.16% 0.14% 0.61%<F2> (0.79)% (0.83)% (0.38)%
PORTFOLIO TURNOVER . 33% 142% 188% 33% 142% 188%
NET ASSETS AT END OF
PERIOD (000 OMITTED) $6,328 $3,695 $1,117 $21,207 $28,722 $24,861
<FN>
- ----------
<F1> For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
<F2> Annualized.
<F3> Not annualized.
<F4> 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.
<F5> Per share data for the periods subsequent to November 30, 1992 are based on average shares outstanding.
<F6> The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee had been
incurred by the Fund, the net investment income (loss) per share and the ratios would have been:
Net investment
loss ......... $ -- $(0.02) $ -- $(0.05) $(0.09) $(0.04)
RATIOS (TO AVERAGE NET ASSETS):
Expenses ..... 1.63% 1.84% 1.93%<F1> 2.71% 2.91% 3.15%
Net investment
income (loss) (0.04)% (0.27)% 0.11%<F1> (1.00)% (1.25)% (0.87)%
</FN>
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS -- CONTINUED
CLASS B SHARES
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------------
CLASS B
--------------------------------------------------------------------------------------
1992 1991 1990 1989 1988<F1>
------ ------ ------ ------ ------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period .. $ 4.80 $ 4.68 $ 6.56 $ 5.88 $ 6.16
======= ======= ======= ====== ======
Income from investment operations --
Net investment income (loss) $ (0.14) $ (0.11) $ (0.07) $ (0.04) $ 0.03
Net realized and unrealized
gain (loss) on investments 0.01 0.23 (1.81) 0.75 (0.31)
------- ------- ------- ------- -------
Total from investment
operations .................... $ (0.13) $ 0.12 $ (1.88) $ 0.71 (0.28)
------- ------- ------- ------- -------
Less distributions declared to
shareholders from net
investment income .................. $ -- $ -- $ -- $ (0.03) $ --
------- ------- ------- ------- -------
Net asset value -- end of
period ............................... $ 4.67 $ 4.80 $ 4.68 $ 6.56 $ 5.88
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total return ......................... (2.71)% 2.56% (28.66)% 12.06% (13.71)%<F2>
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ........................... 4.09% 4.11% 3.88% 3.67% 3.00%<F2>
Net investment income (loss) ....... (2.39)% (2.19)% (2.04)% (1.15)% 0.94%<F2>
PORTFOLIO TURNOVER ................... 189% 135% 114% 92% 12%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ........................ $6,432 $7,056 $7,207 $4,795 $ 1,778
- ----------
<FN>
<F1>For the period from the commencement of investment operations, August 1, 1988 to November 30, 1988.
<F2>Annualized.
</FN>
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund seeks to provide long-term capital
appreciation and preservation of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the Fund's investment
objective.
INVESTMENT POLICIES -- The Fund intends to invest in securities (including
common stocks, convertible debt securities and precious metals and natural
resources indexed debt and equity securities) of companies which are engaged
in, or which receive revenue or income from other companies engaged in: (i)
exploring for, developing, processing, fabricating, producing, distributing,
dealing in or owning gold or other precious metals, nonprecious metals or
minerals or other natural resources (collectively, "natural resources"); (ii)
the development of technologies for the production or use of natural
resources; (iii) the furnishing of technology, equipment, supplies or services
to the natural resources industry; or (iv) gold mine or other natural
resources finance. The Fund may also invest in gold and other precious metals,
bullion and warrants to purchase such bullion.
Natural resources include substances, materials and energy derived from
natural resources which have economic value. Examples of natural resources
include precious metals (e.g., gold, silver, platinum and palladium), ferrous
and non-ferrous metals (e.g., iron, aluminum and copper), strategic metals
(e.g., titanium and chromium), energy resources (e.g., coal, oil, natural gas,
oil shale and uranium), timberland, and agricultural and other commodities.
Under normal market conditions, at least 65% of the Fund's assets will be
invested in some combination of such natural resources securities and natural
resources (including the market value of futures contracts, forward contracts,
options contracts and options on futures contracts on such securities and
natural resources). The Fund will not necessarily hold gold bullion or other
metals. It is the Fund's intention not to take physical possession of natural
resources; when investing in them, ownership would be evidenced by warehouse
or other receipts.
The Fund may concentrate its investments heavily in gold industry-related
securities, other metals and mineral industry-related securities, or other
natural resource industry-related securities. If such investments are
attractive, up to 100% of the portfolio of the Fund could be invested in any
one of such industries. Concentration in one industry increases the risk of
loss of principal. The profits of the companies in which the Fund intends to
invest, and, therefore, the value of its portfolio securities, are directly
affected by the price of gold. The price of gold is subject to dramatic upward
and downward movements, often over short periods of time, and is affected by,
among other things, industrial and commercial demand, investment and
speculation, the monetary and fiscal policies of central banks, governments
and their agencies, including gold auctions conducted by the U.S. Treasury
Department and the International Monetary Fund, and changes in international
balances of payments and governmental responses to them, including currency
devaluations and exchange controls. Since 1973, the price of gold bullion
(London Fix as established by the London gold market) has often, although not
always, risen with inflation, as measured by the U.S. Bureau of Labor
Statistics Consumer Price Index. There are no assurances, however, that in the
future the price of gold bullion will rise with inflation. Moreover, the net
asset value of shares of the Fund may not directly correlate with the price of
gold bullion since the Fund invests not only in gold bullion but also in gold
industry-related securities, other metals and mineral industry-related
securities and other natural resource industry-related 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.
The Fund may invest up to 80% (and expects generally to invest between 25% and
50%) of its total assets in foreign securities not traded on a U.S. exchange.
These securities may sometimes be in the form of European Depositary Receipts
("EDRs").
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described
more fully in the SAI. See "Investment Techniques" in the SAI.
LENDING OF SECURITIES -- The Fund may make loans of its portfolio securities.
Such loans will usually be made only to member banks of the Federal Reserve
System and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government Securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would continue to collect the
equivalent of the interest on the securities loaned and would also receive
either interest (through investment of cash collateral) or a fee (if the
collateral is U S. Government Securities or a letter of credit).
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, the Fund has adopted certain
procedures which are intended to minimize risk.
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.
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 liquid and thus not subject to a Fund's limitation on
investing not more than 15% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to MFS the daily
function of determining and monitoring the liquidity of Rule 144A securities.
The Board, however, will retain sufficient oversight and be ultimately
responsible for the determinations. The Board will carefully monitor the
Fund's investments in Rule 144A securities, focusing on such important
factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of decreasing the
level of liquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing Rule 144A securities held
in the Fund's portfolio. Subject to the Fund's 15% limitation on investments
in illiquid investments, the Fund may also invest in restricted securities
that may not be sold under Rule 144A, which presents certain risks. As a
result, the Fund might not be able to sell these securities when the Adviser
wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, the
judgment of the Adviser may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of unusual
market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of the Fund may be invested in
cash 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. See Appendix B
to this Prospectus for a description of certain short-term obligations.
INDEXED SECURITIES -- The Fund may invest in securities indexed to the prices
of gold, other precious metals or other natural resources. Indexed securities
generally are offered by issuers engaged in a business involving the
underlying commodity, such as mining companies, processors or refiners, or by
financial institutions, including investment banks. Although the terms of
indexed securities may vary, they ordinarily are structured as debt
instruments with a minimum fixed rate of return (or no fixed rate of return)
which increases or decreases in the event of a rise or fall in the price of
the precious metal or other natural resources to which it is indexed. Indexed
securities may trade in the over-the-counter market or may be listed on a
national securities exchange. While indexed securities present the opportunity
for increased returns, an investment in such instruments also involves the
risk of below market returns, in the event of adverse changes in the value of
the precious metals or natural resources to which the securities are indexed.
Investments in indexed securities could involve other risks as well.
DEPOSITARY RECEIPTS: The Fund may also invest in Depositary Receipts including
American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs")). ADRs 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. EDRs are receipts evidencing a similar arrangement to ADRs, but
with a European Bank. Depositary Receipts 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 -- Foreign Securities" below.
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 SAI, which should be read in conjunction with the following
section. In addition, the SAI contains a further discussion of the nature of
the transactions which may be entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call and put
options and purchase call and put options on securities. The Fund will write
options on securities for the purpose of increasing its return on such
securities and/or to protect the value of its portfolio. Generally, the Fund
will only write options to the extent deemed necessary by the Adviser to pay
for expenses, to provide liquidity for redemptions and to hedge 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,
foreign currency futures contracts and precious metals and other natural
resources futures contracts. The Fund may also enter into futures contracts
based on financial indices including any index of U.S. Government Securities
or of obligations issued or guaranteed by a foreign government or any of its
political subdivisions, authorities, agencies or instrumentalities ("Foreign
Government Securities"). (Unless otherwise specified, futures contracts on
indices, precious metals, other natural resources and foreign currency Futures
Contracts are collectively referred to as "Futures Contracts.") The Fund will
utilize Futures Contracts for hedging and non-hedging purposes, subject to
applicable law. Purchases or sales of stock index futures contracts for
hedging purposes are used to attempt to protect the Fund's current or intended
stock investments from broad fluctuations in stock prices, and foreign
currency futures contracts are purchased or sold to attempt to hedge against
the effects of exchange rate charges on the Fund's current or intended
investments in fixed income or foreign securities. In the event that an
anticipated decrease in the value of portfolio securities occurs as a result
of a general stock market decline, a general increase in interest rates or a
decline in the dollar value of foreign currencies in which portfolio
securities are denominated, the adverse effects of such changes may be offset,
in whole or part, by gains on the sale of Futures Contracts. Conversely, the
increased cost of portfolio securities to be acquired, caused by a general
rise in the stock market, a general decline in interest rates or a rise in the
dollar value of foreign currencies, may be offset, in whole or part, by gains
on Futures Contracts purchased by the Fund. Purchases or sales of Futures
Contracts on precious metals and other natural resources will be utilized in a
similar manner, and will be entered into in order to protect against declines
in the value of natural resources and natural resources securities held by the
Fund or increases in the cost of these assets to be acquired. 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, foreign currency futures contracts and precious
metals and other natural resources futures contracts. The Fund may 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
stock index futures contracts, options on foreign currency futures contracts,
options on natural resources futures contracts and options on futures
contracts based on financial indices 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 natural resources or against
increases in the cost of securities or natural resources 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 AND PRECIOUS METALS AND OTHER NATURAL
RESOURCES -- The Fund may enter into contracts for the purchase or sale of a
specific currency and precious metals and other natural resources 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 or natural resources
prices. 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 (or metals) denominated in a
foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. In addition, the Fund may enter into Forward
Contracts on precious metals and other natural resources for the purpose of
hedging against the adverse effects of a decline in natural resources prices
on natural resources held by the Fund or the effects of a rise in natural
resources prices on natural resources to be acquired by the Fund. 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, precious metal
or other natural resource as a hedge against adverse fluctuations in the value
of a second type of currency, precious metal or other natural resource). By
entering into such transactions, however, the Fund may be required to forego
the benefits of advantageous changes in exchange rates or metal and other
natural resources prices. 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. The Fund may also trade other types of
over-the-counter derivative instruments based on gold or precious metals and
other natural resources which are or may become available for trading.
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, metals or other natural resources
and against increases in the dollar cost of securities, metals or other
natural resources 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.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Investment Techniques" in the SAI.
FOREIGN SECURITIES -- As noted above, the Fund may invest a significant
portion of its total assets in foreign securities not traded on a U.S.
exchange (not including ADRs), including securities issued by South African
domiciled companies and companies primarily engaged in financing mining
operations in South African domiciled countries. 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, could reduce
the dollar value of interest of securities 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.
FUTURES CONTRACTS AND FORWARD CONTRACTS -- Although the Fund will enter into
certain transactions in Futures Contracts, Options on Futures Contracts,
Forward Contracts and options for hedging purposes, such transactions do
involve certain risks. For example, a lack of correlation between the index or
instrument underlying an option, Futures Contract or Forward Contract and the
assets being hedged, or unexpected adverse price movements, could render the
Fund's hedging strategy unsuccessful and could result in losses. "Cross
hedging" transactions may involve greater correlation risks. In addition,
there can be no assurance that a liquid secondary market will exist for any
contract purchased or sold, and the Fund may be required to maintain a
position until exercise or expiration, which could result in losses. As noted,
the Fund may also enter into transactions in such instruments (except for
options on foreign currencies) for other than hedging purposes (subject to
applicable law), including speculative transactions, which involve greater
risk. In particular, in entering into such transactions, the Fund may
experience losses which are not offset by gains on other portfolio positions,
thereby reducing its gross income. In addition, the markets for such
instruments may be extremely volatile from time to time, as discussed in the
SAI, which could increase the risks incurred by the Fund in entering into such
transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S.
exchanges regulated by the Commodity Futures Trading Commission (the "CFTC")
and on foreign exchanges. The securities underlying options and Futures
Contracts traded by the Fund may include domestic as well as foreign
securities. Investors should recognize that transactions involving foreign
securities or foreign currencies, and transactions entered into in foreign
countries, may involve considerations and risks not typically associated with
investing in U.S. markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk
and could result in losses which are not offset by gains on other portfolio
assets. For example, the Fund may sell Futures Contracts on an index of
securities in order to profit from any anticipated decline in the value of the
securities comprising the underlying index. In such instances, any losses on
the Futures transaction will not be offset by gains on any portfolio
securities comprising such index, as might occur in connection with a hedging
transaction. The risks related to transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts entered into by the Fund
are set forth in greater detail in the SAI, which should be reviewed in
conjunction with the foregoing discussion.
NON-DIVERSIFICATION -- 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"). Obligations that are
issued or guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities ("U.S. Government Securities") are not subject to any
investment limitation. U.S. Government Securities include interests in trusts
or other entities representing interests in U.S. Government Securities. 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.
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 SAI.)
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD") and such other policies as the Trustees may determine, the Adviser may
consider sales of shares of the Fund and of other investment company clients
of MFD, 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 SAI.
--------------------
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. 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. Constantinos Mokas, an
Assistant Vice President of the Adviser, has been the Fund's portfolio
manager since 1994. Mr. Mokas has been employed as a portfolio manager by the
Adviser since 1990. Subject to such policies as the Trustees may determine,
the Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee, computed and paid monthly,
in an amount equal to 0.75% of the Fund's average daily net assets for its
then-current fiscal year. The Advisor has voluntarily agreed to reduce its
management fee as set forth in the Advisory Agreement to the extent necessary
to maintain total operating expenses of the Fund at a level equal to 1.43% and
2.50% per annum of the Fund's average daily net assets attributable to Class A
and Class B shares, respectively. This voluntary fee reduction may be
rescinded or revised at any time by MFS upon notice to the Fund. In addition,
in order to comply with the expense limitations of a state securities
commission, the Adviser has voluntarily agreed to bear a certain portion of
the operating expenses of the Fund.
For the Fund's fiscal year ended November 30, 1995, MFS received management
fees under the Fund's Advisory Agreement of $299,733 before a reduction of
$64,773.
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 various 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 $43.9 billion on behalf of approximately 1.9 million investor
accounts as of February 29, 1996. As of such date, the MFS organization
managed approximately $1.2 billion of assets invested in equity securities and
approximately $20 billion of assets invested in fixed income securities.
Approximately $3.8 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 also 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.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial will share their views on a variety of investment related issues,
such as the economy, securities markets, portfolio securities and their
issuers, investment recommendations, strategies and techniques, risk analysis,
trading strategies and other portfolio management matters. MFS will have
access to the extensive international equity investment expertise of Foreign &
Colonial, and Foreign & Colonial will have access to the extensive U.S. equity
investment expertise of MFS. One or more MFS investment analysts are expected
to work for an extended period with Foreign & Colonial's portfolio managers
and investment analysts at their offices in London. In return, one or more
Foreign & Colonial employees are expected to work in a similar manner at MFS'
Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in
other cases, however, it may produce increased investment opportunities for
the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer and other financial institutions ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
The Fund offers two classes of shares (Class A and B shares) which bear sales
charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
SALES CHARGE* AS
PERCENTAGE OF: DEALER ALLOWANCE
-------------------------- ----------------
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- --------- -----------------
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 3.05 2.25
$500,000 but less than $1,000,000.. 2.20 2.25 1.70
$1,000,000 or more ................ None** None** See Below**
- ----------
*Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge).
In the following two circumstances, Class A shares are also offered at net
asset value without an initial sales charge but subject to a CDSC, equal to 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates 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.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
COMMISSION PAID
--------------
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT0
-------------- ---------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption as follows:
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%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee payable under the Fund's Class B Distribution Plan (see
"Distribution Plans" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of
Class B shares is 4% of the purchase price of the shares (commission rate of
3.75% plus a service fee equal to 0.25% of the purchase price).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus.
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. See "Distribution Plans" below. However, for
purposes of conversion to Class A shares, all shares in a shareholder's
account that were purchased through the reinvestment of dividends and
distributions paid in respect of Class B shares (and which have not converted
to Class A shares as provided in the following sentence) will be held in a
separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period.
GENERAL: The following information applies to purchases of both classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject 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 shares 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.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A and Class B shares. In addition, from time to
time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD,
at its expense, may provide additional commissions, compensation or
promotional incentives ("concessions") to dealers which sell shares of the
Fund. Such concessions provided by MFD may include financial assistance to
dealers in connection with preapproved conferences or seminars, sales or
training programs for invited registered representatives, payment for travel
expenses, including lodging, incurred by registered representatives for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RETIREMENT PLAN ACCOUNTS. Following the termination of any agreement
between a plan sponsor and the Shareholder Servicing Agent or its affiliates
with respect to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing Agent, the
Shareholder Servicing Agent shall combine all plan participant accounts into a
single omnibus or pooled account for each Fund in which the plan invests.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds at net asset value (if available for sale).
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of
an MFS Fund to shares of any other MFS Fund, except with respect to exchanges
from an MFS money market fund to another MFS Fund which is not an MFS money
market fund (discussed below). With respect to an exchange involving shares
subject to a CDSC, the CDSC will be unaffected by the exchange and the holding
period for purposes of calculating the CDSC will carry over to the acquired
shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between of Class A shares subject to a CDSC and Units,
the CDSC will carry over to the acquired shares or Units and will be deducted
from the redemption proceeds when such shares or Units are subsequently
redeemed, assuming the CDSC is then payable (the period during which the Class
A shares and the Units were held will be aggregated for purposes of
calculating the applicable CDSC). In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to an initial
sales charge of an MFS Fund, the initial sales charge shall be due upon such
exchange, but will not be imposed with respect to any subsequent exchanges
between such Class A shares and Units with respect to shares on which the
initial sales charge has already been paid. In the event that a shareholder
initially purchases Units and then exchanges into Class A shares subject to a
CDSC of an MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth in this paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before
making any exchange. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by the Shareholder Servicing Agent in proper form (i.e., if in writing
- -- signed by the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record) and each exchange must involve either shares having an
aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by
the Shareholder Servicing Agent) or all the shares in the account. If an
Exchange Request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the New York Stock
Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the exchange
will occur on that day if all the requirements set forth above have been
complied with at that time and subject to the Fund's right to reject purchase
orders. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions by
Telephone." The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers. 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 --
General -- Right to Reject Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800) 225-
2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a bank
and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee." The proceeds of such a
redemption, reduced by the amount of any applicable CDSC and the amount of any
income tax required to be withheld, are mailed by check to the designated
account, without charge, if the redemption proceeds do not exceed $1,000, and
are wired in federal funds to the designated account if the redemption
proceeds exceed $1,000. If a telephone redemption request is received by the
Shareholder Servicing Agent by the close of regular trading on the Exchange on
any business day, shares will be redeemed at the closing net asset value of
the Fund on that day. Subject to the conditions described in this section,
proceeds of a redemption are normally mailed or wired on the next business day
following the date of receipt of the order for redemption. The Shareholder
Servicing Agent 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.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of 12 months (in
the case of purchases of $1 million or more of Class A shares or purchases by
certain retirement plans of Class A shares) 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 of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed
without charge ("Free Amount"). Moreover, no CDSC is ever assessed on
additional shares acquired through the automatic reinvestment of dividends or
capital gain distributions ("Reinvested Shares"). Therefore, at the time of
redemption of a particular class, (i) any Free Amount is not subject to the
CDSC and (ii) the amount of the redemption equal to the then-current value of
Reinvested Shares is not subject to the CDSC, but (iii) any amount of the
redemption in excess of the aggregate of the then-current value of Reinvested
Shares and the Free Amount is subject to a CDSC. The CDSC will first be
applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to
all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. Subject to 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
securities (instead of cash) from the Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
See "Purchases -- General -- Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
DISTRIBUTION 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 "Distribution Plans"), after having concluded that there is a reasonable
likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below have not yet been imposed
or are being waived. These circumstances are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A or Class
B shares, as appropriate) (the "Designated Class") annually in order that MFD
may pay expenses on behalf of the Fund relating to the servicing of shares of
the Designated Class. The service fee is used by MFD to compensate dealers
which enter into a sales agreement with MFD in consideration for all personal
services and/or account maintenance services rendered by the dealer with
respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce
the amount of the service fees paid for shares sold prior to a certain date.
Service fees may be reduced for a dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having an aggregate net
asset value at or above a certain dollar level. Dealers may from time to time
be required to meet certain criteria in order to receive service fees. MFD or
its affiliates are entitled to retain all service fees payable under each
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the
use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the separate Distribution Plans. While the amount
of compensation received by MFD in the form of distribution fees during any
year may be more or less than the expense incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution agreement
with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The Distribution Plans have substantially identical provisions with
respect to their operating policies and their initial approval, renewal,
amendment and termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant
to an initial sales charge, a substantial portion of which is paid to or
retained by the dealer making the sale (the remainder of which is paid to
MFD). See "Purchases -- Class A Shares" above. In addition to the initial
sales charge, the dealer also generally receives the ongoing 0.25% per annum
service fee, as discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares. As noted above, MFD may use the distribution
fee to cover distribution-related expenses incurred by it under its
distribution agreement with the Fund, including commissions to dealers and
payments to wholesalers employed by MFD (e.g., MFD pays commission to dealers
with respect to purchases of $1 million or more of Class A shares which are
sold at net asset value but which are subject to a 1% CDSC for one year after
purchase). Distribution fee payments under the Class A Distribution Plans may
be used by MFD to pay securities dealers a distribution fee in an amount equal
on an annual basis to 0.25% per annum of each Fund's average daily net assets
attributable to Class A shares (other than Class A shares that have converted
from Class B shares) owned by investors for whom that securities dealer is the
holder or dealer of record. See "Purchases -- Class A Shares" above. In
addition, to the extent that the aggregate service and distribution fees paid
under the Class A Distribution Plan do not exceed 0.35% per annum of the
average daily net assets of the Fund attributable to Class A shares, the Fund
is permitted to pay such distribution-related expenses or other distribution-
related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases --
Class B Shares" above. MFD will advance to dealers the first year service fee
described above at a rate equal to 0.25% of the purchase price of such shares
and, as compensation therefore, MFD may retain the service fee paid by the
Fund with respect to such shares for the first year after purchase. Dealers
will become eligible to receive the ongoing 0.25% per annum service fee with
respect to such shares commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may be
used by MFD to cover its distribution-related expenses under its distribution
agreement with the Fund (including the 3.75% commission it pays to dealers
upon purchase of Class B shares, as described under "Purchases -- Class B
Shares" above).
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A and Class B
distribution and service fees for its current fiscal year are 0.00% and 1.00%
per annum, respectively. Payment of the 0.25% per annum Class A service fee
will commence on the date that net assets of the Fund attributable to Class A
shares first equal or exceed $40 million. Payment of the 0.10% per annum Class
A distribution fee will commence on such date as the Trustees of the Trust may
determine.
DISTRIBUTIONS
The 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. The
qualification requirements of Subchapter M may limit the extent to which the
Fund may invest in bullion or other metals and natural resources.
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. A
portion of the dividends received from the Fund (but none of the Fund's
capital gain distributions) may qualify for the dividends-received deduction
for corporations. Shortly after the end of each calendar year, each
shareholder will be sent a statement setting forth the federal income tax
status of all dividends and distributions for that 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.
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
treaty. The Fund is also required in certain circumstances to apply backup
withholding at a rate of 31% on taxable dividends and redemption proceeds paid
to any shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments which have been subject to
30% withholding. Prospective shareholders 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 SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value per share of
each class of shares is effective for orders received by the dealer prior to
its calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of 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 SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above 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 (e.g., fidelity bonding and errors and omissions
insurance) existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc.
and Wiesenberger Investment Companies Service. Total rate of return quotations
will reflect the average annual percentage change over stated periods in the
value of an investment in a class of shares of the Fund made at the maximum
public offering price of shares of that class 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 SAI. For further information about the Fund's performance
for the fiscal year ended November 30, 1995, please see the Fund's Annual
Report. A copy of the Annual Report may be obtained without charge by
contacting the Shareholder Servicing Agent (see back cover for address and
phone number). In addition to information provided in shareholder reports, the
Fund may, in its discretion, from time to time, make a list of all or a
portion of its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At
the end of each calendar year, each shareholder will receive income tax
information regarding reportable dividends and capital gain distributions for
that year (see "Tax Status").
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 SAI) 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 (a bank collective investment fund) within a 13-month period
(or 36-month period for purchases of $1 million or more), the shareholder may
obtain such shares at the same reduced sales charge as though the total
quantity were invested in one lump sum, subject to escrow agreements and the
appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent
section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of 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 in shares of the same class
of another MFS Fund, if shares of such Fund are available for sale (and
without any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B 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 if such fund is available for sale. 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 SAI for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital
gain and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
--------------------
The Fund's SAI, dated April 1, 1996, 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
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares is waived
(Section II), and the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B shares, as applicable, is
waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life Assurance Company of Canada
("Sun Life") or any of their subsidiary companies;
* Trustees and retired trustees of any investment company for which
MFD serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other
financial institution ("dealers") which have a sales agreement with
MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
* Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases
-- General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of Plan participant;
* Loan from Plan (repayment of loans, however, will constitute new
sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section 1.401
(k)-1(d)(2), as amended from time to time);
* Termination of employment of Plan participant (excluding, however, a
partial or other termination of the Plan);
* Tax-free return of excess Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent; and
* Distributions from a Plan that has invested its assets in one or
more of the MFS Funds for more than 10 years from the later to occur
of: (i) January 1, 1993 or (ii) the date such Plan first invests
its assets in one or more of the MFS Funds. The sales charges will
be waived in the case of a redemption of all of the Plan's shares in
all MFS Funds (i.e., all the assets of the Plan invested in the MFS
Funds are withdrawn), unless immediately prior to the redemption,
the aggregate amount invested by the Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the Plan's assets in
the MFS Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares is waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have not
agreed with such company or its affiliates, formally or informally, to
waive sales charges on Class A shares or provide any other incentive
with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in a
"wrap" ccount or a similar program under which such clients pay a fee
to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party
administrators, or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old.
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the Plan
participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
GNMA CERTIFICATES -- are mortgage-backed securities 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 either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
The Fund will purchase only GNMA Certificates of the "modified pass- through"
type, which entitle the holder to receive its proportionate share of all
interest and principal payments owed on the mortgage pool, net of fees paid to
the issuer and GNMA. Payment of principal of and interest on GNMA Certificates
of the "modified pass-through" type is guaranteed by GNMA.
The average life of a GNMA Certificate is likely to be substantially less than
the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal invested far in advance of
the maturity of the mortgages in the pool. Foreclosures impose no risk to
principal investment because of the GNMA guarantee.
As the prepayment rates of individual mortgage pools will vary widely, it is not
possible to accurately predict the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of a single-family dwelling mortgage with a 25- 30-year maturity, the type
of mortgage which backs the vast majority of GNMA Certificates, is approximately
12 years. It is therefore customary practice to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.
As a consequence of the fees paid to GNMA and the issuer of GNMA Certificates,
the coupon rate of interest of GNMA Certificates is lower than the interest paid
on the VA-guaranteed or FHA-insured mortgages underlying the GNMA Certificates.
The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates and the rate at which principal so prepaid is reinvested. In
addition, prepayment of mortgages included in the mortgage pool underlying a
GNMA Certificate purchased at a premium may result in a loss to the Fund.
Due to the large amount of GNMA Certificates outstanding and active
participation in the secondary market by securities dealers and investors, GNMA
Certificates are highly liquid instruments. Prices of GNMA Certificates are
readily available from securities dealers and depend on, among other things, the
level of market rates, the Certificate's coupon rate and the prepayment
experience of the pool of mortgages backing each Certificate.
FNMA BONDS -- are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
FHLMC BONDS -- are bonds issued and guaranteed by the Federal Home Loan Mortgage
Corporation and are not guaranteed by the U.S. Government.
EXPORT-IMPORT BANK CERTIFICATES -- are certificates of beneficial interest and
participation certificates issued and guaranteed by the Export-Import Bank of
the United States.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION CERTIFICATES -- are certificates of
beneficial interest guaranteed by the Federal Agricultural Mortgage Corporation.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION BONDS AND NOTES -- are bonds and notes
guaranteed by the Federal Agricultural Mortgage Corporation.
FEDERAL FARM CREDIT BANKS CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds
issued and guaranteed by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration.
FEDERAL HOME LOAN BANK NOTES AND BONDS -- are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
FEDERAL HOME LOAN BANK CERTIFICATES -- are certificates of beneficial interest
and participation certificates issued and guaranteed by the Federal Home Loan
Bank System.
FHA DEBENTURES -- are debentures issued by the Federal Housing Authority of the
U.S. Government.
FICO BONDS AND NOTES -- are bonds and notes issued and guaranteed by the
Financing Corporation.
GSA PARTICIPATION CERTIFICATES -- are participation certificates issued by the
General Services Administration of the U.S. Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
NEW COMMUNITIES DEBENTURES -- are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
REFCORP BONDS AND NOTES -- are bonds and notes issued and guaranteed by the
Resolution Funding Corporation.
SBA DEBENTURES -- are debentures fully guaranteed as to principal and interest
by the Small Business Administration of the U.S. Government.
SLMA DEBENTURES -- are debentures backed by the Student Loan Marketing
Association.
TITLE XI BONDS -- are bonds issued in accordance with the provisions of Title XI
of the Merchant Marine Act of 1936, as amended, the payment of which is
guaranteed by the U.S. Government.
TVA BONDS AND NOTES -- are bonds and notes issued and guaranteed by the
Tennessee Valley Authority.
U.S. DEPARTMENT OF VETERAN AFFAIRS CERTIFICATES -- are certificates of
beneficial interest guaranteed by the U.S. Department of Veteran Affairs.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS -- are bonds issued by the
Washington Metropolitan Area Transit Authority and guaranteed by the Secretary
of Transportation of the U.S. Government.
Although this list includes the primary types of Government Securities in which
the Fund invests (other than U.S. Treasury obligations), the Fund may also
invest in Government Securities other than those listed above.
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA02110
[SMALL LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) Gold & Natural
Resources Fund
500 Boylston Street
Boston, MA 02116
[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) Gold & Natural Resources Fund
Prospectus
April 1, 1996
MGN-1-4/96/34M 6/206
<PAGE>
MFS(R) GOLD & NATURAL STATEMENT OF
RESOURCES FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) April 1, 1996
- ------------------------------------------------------------------------------
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 Auditors and Financial Statements ................ 23
Appendix A.................................................... 24
MFS GOLD & NATURAL RESOURCES FUND
A Series of MFS Series Trust II
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI"), as amended or
supplemented from time to time, sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus, dated April 1, 1996. 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 Gold & Natural Resources 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 Gold & Natural
Resources Fund. The Fund was known as Lifetime Gold
& Natural Resources Trust prior to August 3, 1992
and was known as Lifetime Gold & Precious Metals
Trust prior to April 1, 1992. The Fund became a
series of the Trust on June 3, 1993.
"MFS" or the "Adviser" --Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" --MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" --The Prospectus of the Fund, dated April 1, 1996 as
amended or supplemented from time to time.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment techniques 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, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will usually not exceed five days). During the existence of a
loan, the Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation based on investment of cash collateral or a fee. The Fund would
not, however, have the right to vote any securities having voting rights
during the existence of the loan, but would call the loan in anticipation of
an important vote to be taken among holders of the securities or of the giving
or withholding of their consent on a material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing, and when, in the judgment of the Adviser, the consideration
which could be earned currently from securities loans of this type justifies
the attendant risk. If the Adviser determines to make securities loans, it is
not intended that the value of the securities loaned would exceed 20% of the
value of the Fund's total assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have cash, short-term money market instruments or high
quality debt securities sufficient to cover any commitments or to limit any
potential risk. However, although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to 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).
GOLD AND OTHER NATURAL RESOURCE INVESTMENTS
As noted in the Prospectus, the Fund will invest in securities of companies
involved in the mining process or trading of gold, other precious metals,
nonprecious metals or minerals, other natural resources as well as gold or
other precious metals, related indexes and derivative instruments. Such
investments involve certain risks.
Precious and nonprecious metals prices are affected by various factors such as
economic conditions, political events and monetary policies. As a result,
prices of gold and precious and nonprecious metals and related securities may
fluctuate sharply. The four largest producers of gold are South Africa, the
United States, the former Union of Soviet Socialist Republics and Australia.
Economic, social and political developments and conditions prevailing in these
countries may affect the production and the marketing of newly produced gold
and the sales of central bank gold holdings. The price of gold is affected by
its direct and indirect use to settle net deficits and surpluses between
nations. Because the prices of precious and nonprecious metals may be affected
by unpredictable international monetary policies and economic conditions,
there may be greater likelihood of a more dramatic impact upon the market
price of the Fund's investments than on other investments.
By making investments in gold bullion and other metals and minerals, the Fund
risks failing to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). This would occur if the Fund
either (a) derived more than 10% of its gross income for a taxable year from
sales or other dispositions of bullion or other metal investments and certain
other nonqualifying assets or sources, or (b) at the close of any quarter of a
taxable year held more than 50% of its total gross assets in bullion, other
metal investments and securities not meeting certain tests. If the Fund should
fail to so qualify, it would lose the beneficial tax treatment accorded to
qualifying investment companies under Subchapter M of the Code. Accordingly,
the Fund will endeavor to manage its portfolio within the above limitations.
There can be no assurance that the Fund will qualify as a regulated investment
company in every year. Furthermore, the Fund may be required to make less than
optimal investment decisions, foregoing the opportunity to realize gains, if
necessary to permit the Fund to qualify (see "Investment Restrictions" below).
The gold bullion and other metal investments which the Fund may make will not
generate income and may subject the Fund to taxes, insurance, shipping and
storage costs.
INDEXED SECURITIES. The Fund may invest in securities indexed to the prices of
gold or other precious metals or natural resources, as described in the
Prospectus. An investor's return on an indexed security is dependent on
precious metals prices or natural resources, which can be volatile and
unpredictable, an investment in such instruments may yield a below-market
return in the event that metals or natural resources prices decline during the
term of the security or do not rise sufficiently to increase the minimum
return. Further, it is possible that certain indexed securities purchased by
the Fund will have no minimum rate of return and, in the event of adverse
movements in metals or natural resources prices, the Fund will not receive
interest on its investments. Also, the Commodity Futures Trading Commission
(the "CFTC") has issued certain regulations and interpretations regarding the
extent to which indexed securities may be offered and sold under the Commodity
Exchange Act. If the CFTC were to prohibit or further restrict the offering
of, or trading in, indexed securities, the ability of the Fund to utilize such
investments effectively could be adversely affected.
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.
FOREIGN SECURITIES
The Fund may invest up to 80% (and expects generally to invest between 25% and
50%) 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. Under the
terms of most sponsored arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depository of an unsponsored ADR, on
the other hand, is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass
through voting rights to ADR holders in respect of the deposited securities.
The Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the use
of the depository receipts in the 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
counterparty with which, the option is traded, and applicable laws and
regulations. If the writer's obligation is not so covered, it is subject to
the risk of the full change in value of the underlying security from the time
the option is written until exercise.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the 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, foreign currency futures contracts and natural
resources 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 indices or natural resources 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, precious metal
or other natural resource 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 natural resources and foreign
currency futures contracts, the currency, metals or natural resources are
delivered by the seller and paid for by the purchaser, or on which, in the
case of stock index futures contracts and certain foreign currency futures
contracts, the difference between the price at which the contract was entered
into and the contract's closing value is settled between the purchaser and
seller in cash. Futures Contracts differ from options in that they are
bilateral agreements, with both the purchaser and the seller equally obligated
to complete the transaction. Futures Contracts call for settlement only on the
expiration date and cannot be "exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale
of a security or the purchase of an option in that no purchase price is paid
or received. Instead, an amount of cash or cash equivalents, which varies but
may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the
broker, referred to as "variation margin," are made on a daily basis as the
value of the index or instrument underlying the Futures Contract fluctuates,
making positions in the Futures Contract more or less valuable -- a process
known as "marking to the market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Fund's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or part, by gains on the futures position.
When the Fund is not fully invested in the securities market and anticipates a
significant market advance, it may purchase stock index futures contracts in
order to gain 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.
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.
The Fund may sell Futures Contracts on gold or other precious metals or
natural resources for the purpose of protecting against declines in the value
of such commodities held in its portfolio. Conversely, the Fund will purchase
Futures Contracts on gold or other natural resources in order to hedge against
the increased cost of commodities to be acquired. As in the case of
transactions in other types of Futures Contracts, the decline in the value of
natural resources held by the Fund, or the increase in the cost of natural
resources to be acquired, should, if the hedge is successful, be offset in
whole or in part by gains on the futures position.
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 AND PRECIOUS METALS
AND OTHER NATURAL RESOURCES
As noted in the Prospectus, the Fund may enter into forward foreign currency
exchange contracts for hedging and non-hedging purposes. The Fund may also
enter into forward contracts on precious metals and other natural resources in
order to protect against adverse fluctuations in the prices of such
commodities (collectively, "Forward Contracts"). 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. The
Fund will enter into Forward Contracts on natural resources in order to
protect against a decline in the value of natural resources held by the Fund
or increases in the cost of natural resources to be acquired, in a manner
similar to its use of natural resources 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, precious metal or other natural resource as a hedge
against adverse fluctuations in the value of a second type of currency,
precious metal or other natural resource.
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 or natural resources prices. 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 or natural resources, 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. As noted in the Prospectus, the
Fund also may trade other types of over-the-counter derivative instruments
based on natural resources which are or may become available for trading.
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 may also purchase
or sell Forward Contracts on natural resources where the Adviser expects the
value of the underlying natural resources to increase or decrease between the
time the contract is entered into and its maturity date.
The Fund will profit if the anticipated movements in foreign currency or
natural resources prices exchange rates occur, which will increase its gross
income. Where exchange rates or natural resources prices 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 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 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, natural resource 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 and Forward Contracts for other than hedging purposes, which
could expose the Fund to significant risk of loss if foreign currency exchange
rates or the price of precious metals or natural resources do not move in the
direction or to the extent anticipated. In this regard, the foreign currency
and natural resources markets 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 leveraging effect of such Futures Contract
is minimized.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following
procedure. Except as provided below, the Fund intends to write over-the-
counter options only with primary U.S. Government securities dealers
recognized as such by the Federal Reserve Bank of New York. Also, the
contracts the Fund has in place with such primary dealers provide that the
Fund has the absolute right to repurchase an option it writes at any time at a
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
generally is based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
the-money. The Fund will treat all or a portion of the formula as illiquid for
purposes of the SEC illiquidity ceiling test imposed by the SEC staff. The
Fund may also write over-the-counter options with non-primary dealers,
including foreign dealers (where applicable), and will treat the assets used
to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
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 33 1/3% 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) 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 and its
metals 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.
(4) Purchase the securities of any issuer if (as to 50% of the value of
its total assets) such purchase, at the time thereof, would cause more than
5% of its total assets (taken at market value) to be invested in the
securities of such issuer, other than U.S. Government securities.
(5) Purchase voting securities of any issuer if (as to 50% of the value of
its total assets) such purchase, at the time thereof, would cause more than
10% of the outstanding voting securities of such issuer to be held by the
Fund. For this purpose all indebtedness of an issuer shall be deemed a
single class and all preferred stock of an issuer shall be deemed a single
class.
(6) Invest for the purpose of exercising control or management.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) Invest 25% or more of its total assets in the securities of any one
issuer or industry (other than securities related to gold or precious
metals).
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 total assets (taken at
market value) would be so invested.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in companies which,
including their respective predecessors, have a record of less than three
years' continuous operation.
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 sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), except that the Fund reserves the freedom of action to hold and sell
timberland and other real estate acquired as a result of the ownership of
securities.
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 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. Also the Fund will not 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.
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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida.
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisers, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April 1992); Society
National Bank (commercial bank), Director (prior to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
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
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940 (the
"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 the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,250 per year plus $225 per meeting and $225
committee meeting attended, together with such Trustee's out-of-pocket
expenses. The Trust has adopted a retirement plan for non-interested Trustees
and Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 75
and if the Trustee has completed at least five years of service, he would be
entitled to annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 75
and receive reduced payments if he has completed at least five years of
service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Trust for
Messrs. Brodkin, Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current years service and amortize
past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable under the retirement plan.
As of February 29, 1996, the Trustees and officers, as a group, owned less
than 1% of the outstanding shares of the Fund. As of February 29, 1996, The
First National Bank of Boston, Trustee, IRA A/C Edward A. Fausti, 690 River
Knoll Drive, Marietta, Georgia 30067-4749 was the record owner of
approximately 6.88% of the 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 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 September 1, 1993 (the "Advisory
Agreement"). The Adviser provides the Fund with overall investment advisory
and administrative services, as well as general office facilities. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For these services and facilities, the Adviser
receives a management fee, computed and paid monthly, in an amount equal to
0.75% of the Fund's average daily net assets. The Advisor has voluntarily
agreed to reduce its fee and bear certain operating expenses of the Fund. For
a discussion of the applicable fee waivers, see "Management of the Fund" in
the Prospectus.
For the Fund's fiscal year ended November 30, 1993, the Fund's current
investment adviser, MFS, together with Lifetime Advisers, Inc., a wholly owned
subsidiary of MFS, received in aggregate $129,868 before a reduction of
$85,333, under their investment advisory agreements with the Fund. For the
Fund's fiscal year ended November 30, 1994, MFS received management fees under
the Fund's investment advisory agreement of $261,445 before a reduction of
$143,996. For the Fund's fiscal year end November 30, 1995, MFS received
management fees under the Fund's investment advisory agreement of $299,733
before a reduction of $64,773.
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 expenses of the Fund (other than those assumed by MFS or
MFD) including: governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar
or dividend disbursing agent of the Fund; expenses of repurchasing and
redeeming shares 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,
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 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 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 April 13,
1988 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the
Fund. For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15% and up to 0.22% of assets
attributable to Class A and Class B shares, respectively. In addition, the
Shareholder Servicing Agent will be reimbursed by the Fund for certain
expenses incurred by the Shareholder Servicing Agent on behalf of the Fund.
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, 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 Right of Accumulation or a Letter of Intent (see
"Investment and Withdrawal Programs" in this SAI). A group might qualify to
obtain quantity sales charge discounts (see "Investment and Withdrawal
Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain 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 $529 and dealers received sales charges of $3,287 (as their
concession on gross sales charges of $3,816) for selling Class A shares of the
Fund; the Fund received $164,391 representing the aggregate net asset value of
such shares.
During the fiscal year ended November 30, 1994, MFD received sales charges of
$7,122 and dealers received sales charges of $42,952 (as their concession on
gross sales charges of $50,074) for selling Class A shares of the Fund; the
Fund received $1,510,016 representing the aggregate net asset value of such
shares.
During the fiscal year ended November 30, 1995, MFD received sales charges of
$3,484 and dealers received sales charges of $27,755 (as their concession on
gross sales charges of $31,239) for selling Class A shares of the Fund; the
Fund received $1,644,494 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 years ended November 30, 1995, 1994 and 1993, the Contingent
Deferred Sales Charge (the "CDSC") imposed on redemption of Class B shares was
approximately $85,060, $79,000 and $131,000, 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 from time to time through such broker-dealers on behalf of
the Fund. The Trust's Trustees (together with the Trustees of the other MFS
Funds) have directed the Adviser to allocate a total of $23,100 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, 1995, total brokerage
commissions of $45,688 were paid on transactions (other than U.S. Government
securities, purchased options transactions and short-term obligations) of
$11,698,084.
For the Fund's fiscal year ended November 30, 1994, total brokerage
commissions of $273,545 were paid on total transactions (other than U.S.
Government securities, purchased options transactions and short-term
obligations) of $101,509,468.
For the Fund's fiscal year ended November 30, 1993, total brokerage
commissions of $211,041 were paid on total transactions (other than U.S.
Government securities, purchased options transactions and short-term
obligations) of $75,569,378.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or MFS or any subsidiary of MFS. Investment decisions for the Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, it is
believed that the Fund's ability to participate in volume transactions will
produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available 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 one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any
CDSC. Distributions will be invested at the close of business on the payable
date for the distribution. A shareholder considering the Distribution
Investment Program should obtain and read the prospectus of the other fund and
consider the differences in objectives and policies before making any
investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments, based upon the value of his account. Each payment under a Systematic
Withdrawal Plan ("SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B shares made in any year
pursuant to a SWP generally are limited to 10% of the value of the account at
the time of 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 $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of the Fund, change the payee
or change the amount of each payment. The Shareholder Servicing Agent may
charge the account for services rendered and expenses incurred beyond those
normally assumed by the Fund with respect to the liquidation of shares. No
charge is currently assessed against the account, but one could be instituted
by the Shareholder Servicing Agent on 60 days' notice in writing to the
shareholder in the event that the Fund ceases to assume the cost of these
services. The Fund may terminate any SWP for an account if the value of the
account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another
MFS Fund. Any SWP may be terminated at any time by either the shareholder or
the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be
made at any time 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 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.
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 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 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). 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 in writing or by telephone on any business day
prior to the close of regular trading on the Exchange, the exchange usually
will occur on that day if all of the requirements set forth above have been
complied with at that time. However, payment of the redemption proceeds by the
Fund, and thus the purchase of shares of the other MFS Fund, may be delayed
for up to seven days if the Fund determines that such a delay would be in the
best interest of all its shareholders. Investment dealers which have satisfied
criteria established by MFD may also communicate a shareholder's Exchange
Request to the Shareholder Servicing Agent by facsimile subject to the
requirements set forth above.
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.
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
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.
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 Code.;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested
automatically. For further details with respect to any plan, including fees
charged by the trustee, custodian or MFD, tax consequences and redemption
information, see the specific documents for that plan. Plan documents other
than those provided by MFD may be used to establish any of the plans described
above. Third party administrative services, available for some corporate
plans, may limit or delay the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets (these
requirements may limit the extent to which the Fund may invest in bullion or
other metals and natural resources). Because the Fund intends to distribute
all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code,
it is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and
any state or local income taxes, on the dividends and capital gain
distributions they receive from the Fund. Dividends from ordinary income and
any distributions from net short-term capital gains (whether paid in cash or
reinvested in additional shares) are taxable to shareholders as ordinary
income for federal income tax purposes. A portion of the Fund's ordinary
income dividends (but none of its capital gain distributions) is normally
eligible for the dividends received deduction for corporations if the
recipient otherwise qualifies for that deduction with respect to its holding
of Fund shares. Availability of the deduction to particular corporate
shareholders is subject to certain limitations, and deducted amounts may be
subject to the alternative minimum tax or result in certain basis adjustments.
Distributions of net capital gains, (i.e., the excess of net long-term capital
gains over net short-term capital losses), whether paid in cash or reinvested
in additional shares, are taxable to 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, payable to shareholders of record in such a month, and paid the
following January, will be taxable to shareholders as if received on December
31 of the year in which they are declared. The Fund will notify shareholders
regarding the federal tax status of its distributions shortly after the end of
each calendar year.
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. 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.
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) without payment of an additional sales charge of Class A shares
of the Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).
The Fund's 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 may cause deferral of Fund losses, adjustments in the
holding periods of Fund securities and conversion of short-term into long-term
capital losses. Certain tax elections exist for straddles that may alter the
effects of these rules. The Fund will limit its activities in options, Futures
Contracts, Forward Contracts, bullion, and other metals and natural resources
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.
Investment income received by the Fund from sources within foreign countries
may be subject to foreign income 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.
If the Fund holds more than 50% of its assets in foreign securities at the
close of its taxable year, it may elect to "pass through" to its shareholders
foreign income taxes paid. If the Fund so elects, shareholders will be
required to treat their pro rata portion of the foreign income taxes paid by
the Fund as part of the amounts distributed to them by the Fund, and thus
includable in their gross income for federal income tax purposes. Shareholders
who itemize deductions would then be able to claim a deduction or credit (but
not both) on their federal income tax returns for such amounts subject to
certain limitations. Shareholders who do not itemize deductions would be able
(subject to such limitations) to claim a credit but not a deduction. No
deduction for such amounts will be permitted to individuals in computing their
alternative minimum tax liability. If the Fund does not qualify or elect to
"pass through" to the Fund's shareholders foreign income taxes paid by it,
shareholders will not be able to claim any deduction or credit for any part of
the foreign taxes paid by the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. 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 at a rate of 31% on taxable dividends and redemption
proceeds paid to any shareholder (including a Non-U.S. Person) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be
applied to payments that have been subject to 30% withholding. Distributions
received from the Fund by Non-U.S. Persons may also be subject to tax under
the laws of their own jurisdictions.
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. Gold and silver bullion held by the Fund will be valued at the
last spot settlement price on the Commodity Exchange, Inc., and platinum and
palladium bullion will be valued at the last spot settlement price or, if not
available, the settlement price of the nearest contract month on the New York
Mercantile Exchange. Portfolio securities, metals 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 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, 1995 and for the period from commencement of
operations on August 1, 1988 through November 30, 1995 was -7.72%, 2.96% and
- -1.45%, respectively. The average annual total rate of return for Class B
shares, not giving effect to the CDSC, for the one-year and five-year periods
ended November 30, 1995 and for the period from commencement of operations on
August 1, 1988 through November 30, 1995 was -3.87%, 3.32% and -1.45%,
respectively. The average annual total rate of return for Class A shares for
the one-year period ended November 30, 1995 and for the period from
commencement of operations on September 7, 1993 to November 30, 1995 was
- -8.51% and -1.93% (including the effect of the sales charge) and -2.95% and
0.72%, respectively (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 August
1, 1988 through December 31, 1995. It has been assumed that dividend and
capital gain distributions were reinvested in additional shares. Any
performance results or total rate of return quotation provided by the Fund
should not be considered as representative of the performance of the Fund in
the future since the net asset value of shares of the Fund will vary based not
only on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate total rates of return should be considered when
comparing the total rate of return of the Fund to total rates of return
published for other investment companies or other investment vehicles. Total
rate of return reflects the performance of both principal and income. Current
net asset value and account balance information may be obtained by calling 1-
800-MFS-TALK (637-8255).
<TABLE>
<CAPTION>
MFS GOLD & NATURAL RESOURCES FUND -- CLASS B
--------------------------------------------
DIRECT CAP GAIN DIVIDEND TOTAL
YEAR ENDED INVESTMENT REINVESTMENT REINVESTMENT VALUE
- ---------- ---------- ------------ ------------ -----
<S> <C> <C> <C> <C>
December 31, 1988*......................................... $ 9,107 $ 0 $40 $ 9,147
December 31, 1989.......................................... 10,470 0 47 10,517
December 31, 1990.......................................... 8,035 0 36 8,071
December 31, 1991.......................................... 7,792 0 34 7,826
December 31, 1992.......................................... 7,873 0 35 7,908
December 31, 1993.......................................... 11,558 104 51 11,713
December 31, 1994.......................................... 9,512 85 44 9,641
December 31, 1995.......................................... 8,944 80 41 9,065
<FN>
- ----------
*For the period from the start of business, August 1, 1988, through December 31, 1988.
</TABLE>
EXPLANATORY NOTES -- The results in the table take into account the annual
Rule 12b-1 distribution 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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the Fund; the Fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment
and evaluation of credit, interest rate, market and economic risks.
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(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity
with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-
yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first-closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market-
value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisors.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the
first trust to invest in companies deemed to be union-friendly by an
advisory board of senior labor officials, senior managers of companies
with significant labor contracts, academics and other national labor
leaders or experts.
9. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A and Class B
shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940 Act
and Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the Fund's expense ratio to the extent 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 Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time);
or (ii) to any insurance company which has entered into an agreement with the
Fund and MFD that permits such insurance company to purchase Class A shares
from the Fund at their net asset value in connection with annuity agreements
issued in connection with the insurance company's separate accounts. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum
amount requirement from time to time. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under any Distribution Plan for which there is no dealer of record or for
which qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended November 30, 1995, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- ------------------ ------------ ------------- -------------
Class A Distribution Plan $ -0- $ -0- $ -0-
Class B Distribution Plan $258,788 $206,435 $ 52,353
GENERAL: Each of the Distribution Plans 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 vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall
provide the Trustees, and the Trustees shall review, at least quarterly, a
written report of the amounts expended (and purposes therefor) under such
Plan. Each of the Distribution Plans may be terminated at any time by vote of
a majority of the Distribution Plan Qualified Trustees or by vote of the
holders of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions"). All agreements relating to any of the
Distributions Plans entered into between the Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority
of the Distribution Plan Qualified Trustees. Agreements under any of the
Distribution Plans must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment of any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of the Fund's shares. None
of the Distribution Plans may be amended to increase materially the amount of
permitted distribution expenses without the approval of a majority of the
respective class of the Fund's shares (as defined in "Investment
Restrictions") or may be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans 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, as well as Class C shares for
one series. Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, shareholders of each class are entitled to share pro
rata in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
would participate equally in the earnings, dividends and assets allocable to
that class of a 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 AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance with tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
The Portfolio of Investments at November 30, 1995, the Statement of Assets and
Liabilities at November 30, 1995, the Statement of Operations for the year
ended November 30, 1995, the Statement of Changes in Net Assets for each of
the two years in the period ended November 30, 1995, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent auditors, as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,725 $ 685 10 $263,815
A. Keith Brodkin --0-- --0-- N/A --0--
Marshall N. Cohan 4,175 1,487 13 148,624
Dr. Lawrence Cohn 3,725 350 18 135,874
Sir David Gibbons 3,725 1,251 13 135,874
Abby M. O'Neill 3,500 491 10 129,499
Walter E. Robb, III 4,175 1,487 13 148,624
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
J. Dale Sherratt 4,175 395 20 148,624
Ward Smith 4,175 609 13 148,624
<FN>
(1) For fiscal year ended November 30, 1995.
(2) Based on normal retirement age of 75.
(3) Information provided is for calendar year 1995. All Trustees receiving compensation served as Trustees of 36 funds within
the MFS fund complex (having aggregate net assets at December 31, 1995, of approximately $12.5 billion) except Mr. Bailey,
who served as Trustee of 73 funds within the MFS fund complex (having aggregate net assets at December 31, 1995, of
approximately $31.7 billion).
</FN>
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
------------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,150 $473 $ 788 $1,103 $1,575
3,439 516 860 1,203 1,719
3,727 559 932 1,304 1,864
4,016 602 1,004 1,405 2,008
4,304 646 1,076 1,506 2,152
4,593 689 1,148 1,607 2,296
<FN>
(4) 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 AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
GOLD & NATURAL
RESOURCES FUND
500 Boylston Street
Boston, MA 02116
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS
MGN-13-4/96/500
<PAGE>
<PAGE>
ANNUAL REPORT FOR
YEAR ENDED
NOVEMBER 30, 1995
[logo] M F S (SM)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) GOLD & NATURAL RESOURCES FUND
Front cover
A photo of computer keyboard.
<PAGE>
MFS(R) GOLD & NATURAL RESOURCES FUND
<TABLE>
<S> <C>
TRUSTEES SECRETARY
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), ASSISTANT SECRETARY
Massachusetts Financial Services Company; James R. Bordewick, Jr.*
Director, Cambridge Bancorp; Director,
Cambridge Trust Company CUSTODIAN
Marshall N. Cohan - Private Investor State Street Bank and Trust Company
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; AUDITORS
Professor of Surgery, Harvard Medical School Deloitte & Touche LLP
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.; INVESTOR INFORMATION
Chairman, Bank of N.T. Butterfield & Son Ltd. For MFS stock and bond market outlooks,
Abby M. O'Neill - Private Investor; call toll free: 1-800-637-4458 anytime from
Director, Rockefeller Financial Services, Inc. a touch-tone telephone.
(investment adviser) For information on MFS mutual funds,
Walter E. Robb, III - President and Treasurer, call your financial adviser or, for an
Benchmark Advisors, Inc. (corporate financial information kit, call toll free:
consultants); President, Benchmark Consulting 1-800-637-2929 any business day from
Group, Inc. (office services); Trustee, 9 a.m. to 5 p.m. Eastern time (or leave
Landmark Funds (mutual funds) a message anytime).
Arnold D. Scott* - Senior Executive Vice
President, Director and Secretary, INVESTOR SERVICE
Massachusetts Financial Services Company MFS Service Center, Inc.
Jeffrey L. Shames* - President and Director, P.O. Box 2281
Massachusetts Financial Services Company Boston, MA 02107-9906
J. Dale Sherratt - President, Insight Resources, For general information, call toll free:
Inc. (acquisition planning specialists) 1-800-225-2606 any business day from
Ward Smith - Former Chairman (until 1994), 8 a.m. to 8 p.m. Eastern time.
NACCO Industries; Director, Sundstrand For service to speech- or hearing-impaired,
Corporation call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
INVESTMENT ADVISER (To use this service, your phone must be
Massachusetts Financial Services Company equipped with a Telecommunications Device for
500 Boylston Street the Deaf.)
Boston, MA 02116-3741 For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
DISTRIBUTOR (1-800-637-8255) anytime from a touch-tone
MFS Fund Distributors, Inc. telephone.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Constantinos Mokas* ----------------------------------------------------
TOP-RATED SERVICE
TREASURER DALBAR For the second year in a
W. Thomas London* row, MFS earned a
MFS #1 MFS #1 ranking in
ASSISTANT TREASURER DALBAR, Inc.'s
James O. Yost* DALBAR Broker/Dealer Survey,
Main Office Operations
Service Quality category. The firm achieved a 3.49
overall score - on a scale of 1 to 4 - in the 1995
survey. A total of 71 firms responded, offering input
on the quality of service they receive from 36 mutual
fund companies nationwide. The survey contained
questions about service quality in 17 categories,
including "knowledge of phone service contacts,"
"accuracy of transactions processing," and "overall
ease of doing business with the firm."
----------------------------------------------------
</TABLE>
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
For the fiscal year ended November 30, 1995, the Fund's Class A and Class B
shares reported total returns of -2.95% and -3.87%, respectively (including
the reinvestment of distributions but excluding the effects of any sales
charges). This compares to a return of -0.1% for the Financial Times Gold
Mines Index (the Index), an unmanaged index designed to reflect the
performance in international markets of companies engaged primarily in gold
mining.
Economic Outlook
Moderate, but sustainable, growth has been the hallmark of the economic
expansion's fifth year. While initial estimates showed the U.S. economy
growing at an annual rate of 4.2% in the third quarter, this surprisingly
strong growth was mainly driven by a pickup in consumer spending and an
increase in business and government outlays. Although impressive, this growth
rate is not expected to continue in coming months. Recent retail sales have
been disappointing, in part because of rising levels of consumer debt. An
extended period of lower mortgage rates seems to have relieved much of the
pent-up demand for housing. Growth is not expected to get much help from the
manufacturing sector, either, as order flows from manufacturers have
moderated. Export activity, meanwhile, is also expected to remain modest as
continued weakness abroad has limited demand for many U.S. goods. However, the
Federal Reserve Board's consistent and, so far, successful efforts to fight
inflation seem to be giving consumers and businesses enough longer term
confidence to help maintain modest growth in real (adjusted for inflation)
gross domestic product into 1996.
Stock Market
After some volatility late in the third quarter, the stock market continued to
strengthen. Although many companies reported solid third-quarter results,
there was some weakness in the earnings of retail, financial services and even
some technology companies. However, a slowdown in earnings may be a positive
development if it is an indication that the economy is not overheating and
that inflation is under control. While we see a deceleration of corporate
earnings as the inevitable consequence of traditional business cycles, we
remain encouraged by the high absolute level of profitability among U.S.
companies. Also, many companies' increasing emphasis on cost containment and
growing use of technology have helped keep them highly competitive and
reasonably profitable. Looking ahead, we believe that a stabilizing interest
rate environment, coupled with reasonable earnings reports, could justify
current market valuations.
Portfolio Performance and Strategy
During the 12-month period from November 30, 1994 to November 30, 1995, the
Fund and the Index were impacted by dramatically divergent country
performance. Specifically, the North American component of the Index increased
by 16.5%, while Africa and Australia declined by 23% and 3.8%, respectively.
The Fund underperformed the Index because its African weighting, although
underweighted versus the Index, was concentrated in South Africa, where the
Johannesburg Stock Exchange Gold Index underperformed the African component of
the Index. Weakness in Africa was related to labor unrest, which led to lower
production than expected. The strength in North American stocks was driven by
a 1.9% increase in the price of gold and lower production costs.
For the second straight year, gold prices showed little volatility,
reflecting modest inflation. Currently, fundamentals for gold are reasonably
favorable, with increased jewelry demand, especially from China and India. On
the supply side, we believe mine production could decline in 1995 following a
drop in 1994. Production in 1996 should be relatively flat, driven by lower
South African output. The sharp increase in gold-lease rates is a reflection
of the current supply/demand imbalance. Economic characteristics are mixed,
with falling interest rates being offset by modest expectations for inflation.
Reflecting this outlook, the Fund remains fully invested in precious-metal-
related securities.
<PAGE>
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin /s/ Constantinos Mokas
A. Keith Brodkin, Constantinos Mokas,
Chairman and President Portfolio Manager
December 13, 1995
<PAGE>
PORTFOLIO MANAGER PROFILE
A graduate of Dartmouth College and the Amos Tuck School of Business
Administration of Dartmouth College, Constantinos Mokas began his career at
MFS in 1990 as an industry specialist and was named Assistant Vice President
in 1994. He became the Portfolio Manager for MFS Gold & Natural Resources Fund
in December 1994.
OBJECTIVE AND POLICY
The Fund seeks to provide long-term capital appreciation and preservation of
capital. Dividend and interest income from portfolio securities, if any, is
incidental to the Fund's investment objective.
The Fund intends to invest in securities (including common stocks, convertible
debt securities and precious metals and natural resources indexed debt and
equity securities) of companies which are engaged in, or which receive revenue
or income from other companies engaged in: exploring for, developing, pro-
cessing, fabricating, producing, distributing, dealing in or owning gold or
other precious metals, nonprecious metals or minerals or other natural
resources; the development of technologies for the production or use of
natural resources; the furnishing of technology, equipment, supplies or
services to the natural resources industry; or gold mine or other natural
resources finance. The Fund may also invest in gold and other precious metals,
bullion and warrants to purchase such bullion.
TAX FORM SUMMARY
In January 1996, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
PERFORMANCE
The information on the following page illustrates the historical performance
of MFS Gold & Natural Resources Fund Class B shares in comparison to various
market indicators. Fund results in the graph do not reflect the deduction of
any contingent deferred sales charge (CDSC) since the CDSC is not applicable
after a six-year period. Benchmark comparisons are unmanaged and do not
reflect any fees or expenses. You cannot invest in an index. All results
reflect the reinvestment of all dividends and capital gains.
Please note that effective September 7, 1993, Class A shares were offered.
Information on Class A share performance appears on the next page.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from August 1, 1988 to November 30, 1995)
Line graph representing the growth of a $10,000 investment for the eight-year
period ended November 30, 1995. The graph is scaled from $5,000 to $30,000 in
$5,000 segments. The years are marked in 12-month segments from 1988 to 1995.
There are three lines drawn to scale. One is a solid line representing MFS Gold
& Natural Resources Fund (Class B), a second line of short dashes represents the
S&P 500, a third line of medium-short dashes represents the Consumer Price
Index.
MFS Gold & Natural Resources Fund (Class B) $ 8,982
S&P 500 $27,956
Consumer Price Index $12,984
AVERAGE ANNUAL TOTAL RETURNS
Life of
Class
through
1 Year 3 Years 5 Years 11/30/95
- ------------------------------------------------------------------------------
MFS Gold & Natural Resources
Fund (Class A)
including 5.75% sales charge - 8.51% -- -- - 1.93%*
- ------------------------------------------------------------------------------
MFS Gold & Natural Resources
Fund (Class A)
at net asset value - 2.95% -- -- + 0.72%*
- ------------------------------------------------------------------------------
MFS Gold & Natural Resources
Fund (Class B)
with CDSC+ - 7.72% + 4.76% + 2.96% - 1.45%++
- ------------------------------------------------------------------------------
MFS Gold & Natural Resources
Fund (Class B)
without CDSC - 3.87% + 5.66% + 3.32% - 1.45%++
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite
Index(++) +36.93% +15.05% +16.76% +15.05%**
- ------------------------------------------------------------------------------
Consumer Price Index(S) + 2.61% + 2.65% + 2.80% + 3.62%**
- ------------------------------------------------------------------------------
* For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1995.
+ These returns reflect the applicable Class B CDSC of 4%, 3% and 2% for the
1-, 3- and 5-year periods, respectively, and 0% for the period commencing
August 1, 1988.
++ For the period from the commencement of offering of Class B shares,
August 1, 1988 to November 30, 1995.
(++) The Standard & Poor's 500 Composite Index is a popular, unmanaged index of
common stock performance.
** Benchmark comparisons begin on August 1, 1988.
(S) The Consumer Price Index is a popular measure of change in prices.
All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in a
mutual fund will vary with changes in market conditions, and shares, when
redeemed, may be worth more or less than their original cost. All Fund results
reflect the applicable expense subsidy which is explained in the Notes to
Financial Statements. Had the subsidy not been in effect, the results would
have been less favorable.
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1995
Common Stocks - 94.0%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Precious Metals and Minerals - U.S. - 30.5%
Amax Gold, Inc.(+) 185,000 $ 1,179,375
Battle Mountain Gold Co. 120,000 1,065,000
Freeport - McMoRan Copper & Gold, Inc. 40,000 1,080,000
Hecla Mining Co.(+) 90,000 652,500
Homestake Mining Co. 40,000 660,000
Newmont Mining Corp. 55,000 2,371,875
Santa Fe Pacific Gold Co. 60,000 720,000
Stillwater Mining Co.(+) 40,000 685,000
-----------
$ 8,413,750
- -----------------------------------------------------------------------------
Precious Metals and Minerals - Canada - 30.8%
Agnico-Eagle Mines Ltd. 70,000 $ 875,000
Barrick Gold Corp. 80,000 2,110,000
Euro Nevada Mining Corp. Ltd. 40,000 1,486,278
Placer Dome, Inc. 75,000 1,856,250
Southern Africa Minerals Corp.(+) 400,000 294,312
TVX Gold, Inc.(+)* 275,000 1,856,250
-----------
$ 8,478,090
- -----------------------------------------------------------------------------
Precious Metals and Minerals - Australia - 9.4%
Newcrest Mining 150,000 $ 676,228
Nuigini Mining Ltd.(+) 100,000 170,821
Placer Pacific 300,000 641,693
Poseidon Gold Ltd. 300,000 583,762
Western Mining Holding, ADS 75,000 502,994
-----------
$ 2,575,498
- -----------------------------------------------------------------------------
Precious Metals and Minerals - South Africa - 23.3%
Ashanti Goldfields Co.#(+) 32,500 $ 593,125
Driefontein Consolidated, ADR 45,000 472,500
Free State Consolidated Gold Mines Ltd., ADR 100,000 800,000
Hartebeestfontein Gold Mining Co. Ltd., ADR 185,000 462,500
Kloof Gold Mining Ltd., ADR 95,000 908,437
Rustenburg Platinum Holdings Ltd., ADR 15,305 264,011
Vaal Reefs Exploration & Mining Co. Ltd.,
ADR 100,000 656,250
Western Areas Gold Mining Ltd., ADR 100,000 1,625,000
Western Deep Levels Ltd., ADR 20,000 630,000
-----------
$ 6,411,823
- -----------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $27,601,611) $25,879,161
- -----------------------------------------------------------------------------
Short-Term Obligations - 3.2%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Melville Corp., 5.88%, due 12/01/95, at
Amortized Cost $ 885 $ 885,000
- -----------------------------------------------------------------------------
Total Investments (Identified Cost,
$28,486,611) $26,764,161
Other Assets, Less Liabilities - 2.8% 771,285
=============================================================================
Net Assets - 100.0% $27,535,446
- -----------------------------------------------------------------------------
(+) Non-income producing security.
* Restricted security.
# SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $28,486,611) $26,764,161
Cash 1,591
Receivable for Fund shares sold 970,534
Dividends and interest receivable 18,457
Receivable from investment adviser 64,773
Other assets 475
-----------
Total assets $27,819,991
-----------
Liabilities:
Payable for Fund shares reacquired $ 175,301
Payable to affiliates -
Management fee 554
Shareholder servicing agent fee 151
Distribution fee 9,825
Accrued expenses and other liabilities 98,714
-----------
Total liabilities $ 284,545
-----------
Net assets $27,535,446
===========
Net assets consist of:
Paid-in capital $32,067,047
Unrealized depreciation on investments and translation of
assets
and liabilities in foreign currencies (1,722,456)
Accumulated net realized loss on investments and foreign
currency transactions (2,779,679)
Accumulated net investment loss (29,466)
-----------
Total $27,535,446
===========
Shares of beneficial interest outstanding 5,017,733
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $6,328,189 / 1,131,379 shares of
beneficial interest outstanding) $5.59
=====
Offering price per share (100/94.25) $5.93
=====
Class B shares:
Net asset value and offering price per share
(net assets of $21,207,257 / 3,886,354 shares of
beneficial interest outstanding) $5.46
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
and Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended November 30, 1995
- ------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 446,170
Interest 82,455
-----------
Total investment income $ 528,625
-----------
Expenses -
Management fee $ 234,960
Trustees' compensation 41,564
Shareholder servicing agent fee (Class A) 8,174
Shareholder servicing agent fee (Class B) 56,934
Distribution and service fee (Class B) 258,788
Printing 47,979
Auditing fees 33,975
Custodian fee 20,780
Postage 11,911
Legal fees 3,509
Miscellaneous 71,105
-----------
Total expenses $ 789,679
Reduction of expenses by investment adviser (64,773)
-----------
Net expenses $ 724,906
-----------
Net investment loss $ (196,281)
===========
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(1,624,130)
Foreign currency transactions (281)
-----------
Net realized loss on investments and foreign currency
transactions $(1,624,411)
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 417,935
Translation of assets and liabilities in foreign currencies (6)
-----------
Net unrealized gain on investments $ 417,929
-----------
Net realized and unrealized loss on investments and
foreign currency $(1,206,482)
-----------
Decrease in net assets from operations $(1,402,763)
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended November 30, 1995 1994
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment loss $ (196,281) $ (257,017)
Net realized loss on investments and foreign
currency transactions (1,624,411) (982,244)
Net unrealized gain (loss) on investments and
foreign
currency translation 417,929 (4,815,973)
------------ ------------
Decrease in net assets from operations $ (1,402,763) $ (6,055,234)
------------ ------------
Distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions $ -- $ (199,908)
Tax return of capital -- (59,378)
------------ ------------
Total distributions declared to shareholders $ -- $ (259,286)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 70,516,741 $ 77,699,674
Net asset value of shares issued to
shareholders in reinvestment
of distributions -- 231,545
Cost of shares reacquired (73,995,431) (65,177,978)
------------ ------------
Increase (decrease) in net assets from Fund
share transactions $ (3,478,690) $ 12,753,241
------------ ------------
Total increase (decrease) in net assets $ (4,881,453) $ 6,438,721
Net assets:
At beginning of period 32,416,899 25,978,178
------------ ------------
At end of period (including accumulated net
investment loss of $29,466 and $22,892,
respectively) $ 27,535,446 $ 32,416,899
============ ============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------
Year Ended November 30, 1995 1994 1993<F1> 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Class A Class B
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 5.76 $ 6.54 $ 5.55 $ 5.68 $ 6.53 $ 4.67
------ ------ ------ ------ ------ ------
Income from investment
operations<F5> -
Net investment income
(loss)<F6> $ 0.01 $ 0.01 $ 0.01 $(0.04) $(0.06) $(0.02)
Net realized and unrealized
gain (loss) on investments (0.18) (0.73) 0.98 (0.18) (0.73) 1.88
------ ------ ------ ------ ------ ------
Total from investment
operations $(0.17) $(0.72) $ 0.99 $(0.22) $(0.79) $ 1.86
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net realized gain on
investments $ -- $(0.05) $ -- $ -- $(0.05) $ --
Tax return of capital -- (0.01) -- -- (0.01) --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $ -- $(0.06) $ -- $ -- $(0.06) $ --
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 5.59 $ 5.76 $ 6.54 $ 5.46 $ 5.68 $ 6.53
====== ====== ====== ====== ====== ======
Total return<F4> (2.95)% (11.14)% 17.84%<F3> (3.87)% (12.24)% 39.83%
Ratios (to average net assets)/Supplemental data<F6>:
Expenses 1.43% 1.42% 1.43%<F2> 2.50% 2.49% 2.66%
Net investment income (loss) 0.16% 0.14% 0.61%<F2> (0.79)% (0.83)% (0.38)%
Portfolio turnover 33% 142% 188% 33% 142% 188%
Net assets at end of period
(000 omitted) $6,328 $3,695 $1,117 $21,207 $28,722 $24,861
<FN>
<F1> For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
<F2> Annualized.
<F3> Not annualized.
<F4> 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.
<F5> Per share data for the periods subsequent to November 30, 1992 are based on average shares outstanding.
<F6> The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee had been incurred
by the Fund, the net investment income (loss) per share and ratios would have been:
Net investment loss $ -- $(0.02) $ -- $(0.05) $(0.09) $(0.04)
Ratios (to average net assets):
Expenses 1.63% 1.84% 1.93%<F2> 2.71% 2.91% 3.15%
Net investment income (loss) (0.04)% (0.27)% 0.11%<F2> (1.00)% (1.25)% (0.87)%
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Ended November 30, 1992 1991 1990 1989 1988<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 $ 4.80 $ 4.68 $ 6.56 $ 5.88 $ 6.16
------ ------ ------ ------ ------
Income from investment
operations -
Net investment income
(loss)(S) $(0.14) $(0.11) $(0.07) $(0.04) $ 0.03
Net realized and
unrealized gain (loss) on
investments 0.01 0.23 (1.81) 0.75 (0.31)
------ ------ ------ ------ ------
Total from investment
operations $(0.13) $ 0.12 $(1.88) $ 0.71 $(0.28)
------ ------ ------ ------ ------
Less distributions declared
to shareholders from net
investment income $ -- $ -- $ -- $(0.03) $ --
------ ------ ------ ------ ------
Net asset value - end of
period $ 4.67 $ 4.80 $ 4.68 $ 6.56 $ 5.88
====== ====== ====== ====== ======
Total return (2.71)% 2.56% (28.66)% 12.06% (13.71)%<F2>
Ratios (to average net assets)/Supplemental data:
Expenses 4.09% 4.11% 3.88% 3.67% 3.00%<F2>
Net investment income
(loss) (2.39)% (2.19)% (2.04)% (1.15)% 0.94%<F2>
Portfolio turnover 189% 135% 114% 92% 12%
Net assets at end of period
(000 omitted) $6,432 $7,056 $7,207 $4,795 $1,778
<FN>
<F1> For the period from the commencement of investment operations, August 1, 1988 to November 30, 1988.
<F2> Annualized.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Gold & Natural Resources 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, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices. Short-
term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. 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.
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.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded for financial statement purposes as unrealized until
the contract settlement date.
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 discounts are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend 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 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, 1995, $189,707 and $1,150
were reclassified from accumulated net investment loss and accumulated net
realized loss on investments, respectively, 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.
At November 30, 1995, the Fund, for federal income tax purposes, had a capital
loss carryforward of $2,725,073, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on November 30, 2003 ($1,781,104) and November 30, 2002 ($943,969).
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class
A and Class B shares. The two classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the common expenses of the Fund pro rata based on average daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75%
of average daily net assets. The investment adviser did not impose a portion
of its fee, which is reflected as a reduction of expenses in the Statement of
Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all of its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $7,989 for the year ended November 30, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$3,484 for the year ended November 30, 1995, as its portion of the sales
charge on sales of Class A shares of the Fund. The Trustees have adopted
separate distribution plans for Class A and Class B shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. Payments will
commence under the distribution plan on such date that 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 MFD a monthly
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B shares.
MFD will pay to securities dealers that enter into a sales agreement with MFD
all or a portion of the service fee attributable to Class B shares. The
service fee is intended to be additional consideration for services rendered
by the dealer with respect to Class B shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $12,344
for Class B shares for the year ended November 30, 1995. Fees incurred under
the distribution plan during the year ended November 30, 1995 were 1.00% of
average daily net assets attributable to Class B shares on an annualized
basis.
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
shareholder 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 shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended November 30, 1995 were $0
and $85,060 for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A
and Class B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$9,841,830 and $13,047,765, 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 $28,523,114
===========
Gross unrealized depreciation $(4,168,743)
Gross unrealized appreciation 2,409,790
-----------
Net unrealized depreciation $(1,758,953)
===========
(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 1995 1994
30, --------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 5,439,951 $ 31,316,326 2,907,898 $ 19,655,097
Shares issued to
shareholders in
reinvestment of
distributions -- -- 2,239 15,848
Shares reacquired (4,950,704) (28,287,454) (2,438,784) (16,234,794)
--------- ------------ --------- ------------
Net increase 489,247 $ 3,028,872 471,353 $ 3,436,151
========= ============ ========= ============
Class B Shares
Year Ended November 1995 1994
30, --------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 7,007,971 $ 39,200,415 8,675,307 $ 58,044,577
Shares issued to
shareholders in
reinvestment of
distributions -- -- 30,556 215,697
Shares reacquired (8,180,833) (45,707,977) (7,456,173) (48,943,184)
--------- ------------ --------- ------------
Net increase
(decrease) (1,172,862) $ (6,507,562) 1,249,690 $ 9,317,090
=========== ============ =========== ============
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended November
30, 1995 was $381.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
The Fund did not invest in any such obligations during the year ended November
30, 1995.
(8) Restricted Securities
The Fund may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At November 30,
1995, the Fund owned the following restricted securities (constituting 8.90%
of net assets) which may not be publicly sold without registration under the
Securities Act of 1933 (the 1933 Act). 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. Certain of
these securities may be offered and sold to "qualified institutional buyers"
under Rule 144A of the 1933 Act.
Description Date of Acquisition Shares Cost Value
- ------------------------------------------------------------------------------
Ashanti Goldfields Co. 12/22/94 32,500 $ 698,750 $ 593,125
TVX Gold, Inc. 6/28/93 275,000 2,028,680 1,856,250
----------
$2,449,375
==========
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust II and the Shareholders of
MFS Gold & Natural Resources Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Gold & Natural Resources Fund
(one of the series constituting MFS Series Trust II) as of November 30, 1995,
the related statement of operations for the year then ended, the statement of
changes in net assets for the years ended November 30, 1995 and 1994, and the
financial highlights for each of the years in the eight-year period ended
November 30, 1995. 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, 1995 by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Gold & Natural
Resources Fund at November 30, 1995, 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 5, 1996
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) GOLD &
NATURAL RESOURCES FUND
500 Boylston Street
Boston, MA 02116
[logo]
MFS #1 MFS
[logo] M F S
THE FIRST NAME IN MUTUAL FUNDS
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
MGN-2-1/96/10M 6/206
<PAGE>
PROSPECTUS
MFS(R) INTERMEDIATE April 1, 1996
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 ................................. 5
5. Investment Techniques ............................................. 6
6. Additional Risk Factors ........................................... 11
7. Management of the Fund ............................................ 15
8. Information Concerning Shares of the Fund ......................... 16
Purchases ...................................................... 16
Exchanges ...................................................... 19
Redemptions and Repurchases .................................... 20
Distribution Plans ............................................. 23
Distributions .................................................. 24
Tax Status ..................................................... 24
Net Asset Value ................................................ 25
Description of Shares, Voting Rights and Liabilities ........... 25
Performance Information ........................................ 26
9. Shareholder Services .............................................. 26
Appendix A ........................................................ 28
Appendix B ........................................................ 31
Appendix C ........................................................ 32
Appendix D ........................................................ 35
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
This Prospectus pertains to MFS Intermediate Income Fund (the "Fund"), a non-
diversified series of MFS Series Trust II (the "Trust"), an open-end management
investment company consisting of four series. The Fund's investment objective is
to preserve capital and provide high current income. 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 "Information Concerning Shares
of the Fund -- Purchases"). The Fund's investment adviser and distributor are
Massachusetts Financial Services Company ("MFS" or the "Adviser") and MFS Fund
Distributors, Inc. ("MFD"), respectively, both of which are located at 500
Boylston Street, Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
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 (the "SAI"), dated April 1, 1996,
as amended or supplemented from time to time, which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 28 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number).
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) ........................................ 4.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) ................ See Below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ........................................................ 0.77% 0.77%
Rule 12b-1 Fees ........................................................ 0.00%(2) 1.00%(3)
Other Expenses(4) ...................................................... 0.37% 0.46%
---- ----
Total Operating Expenses ............................................... 1.14% 2.23%
<FN>
- ----------
(1) 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" below).
(2) 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. Payment of the 0.10% per annum Class A distribution
fee will commence on such date as the Trustees of the Trust may determine. Payment of the 0.25% per
annum Class A service fee will commence on the date that net assets attributable to Class A shares first
equal or exceed $40 million. (See "Information Concerning Shares of the Fund -- Distribution Plans"
below).
(3) 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 "Information Concerning Shares of
the Fund -- Distribution Plans" below). Distribution expenses paid under this Plan, together with any
CDSC, may cause long-term shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
(4) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount
of cash maintained by the Fund with its custodian and dividend disbursing agent, and may enter into
other such arrangements and directed brokerage arrangements (which would also have the effect of
reducing the Fund's expenses). Any such fee reductions are not reflected under "Other Expenses."
</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):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B
------ ------- ----------------------
<S> <C> <C> <C>
(1)
1 year ..................................................... $ 59 $ 63 $ 23
3 years .................................................... 82 100 70
5 years .................................................... 107 139 119
10 years .................................................... 180 229(2) 229(2)
<FN>
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after purchase; therefore, years nine
and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund
will bear directly or indirectly. More complete descriptions of the following
Fund expenses are set forth in the following sections: (i) varying sales
charges on share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases";
(iii) management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e.,
distribution plan) fees -- "Distribution 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 objectives and policies. Shares of the Fund are
continuously sold to the public and the Fund then uses the proceeds to buy
securities for its portfolio. Two classes of shares of the Fund currently are
offered to the general public. Class A shares are offered at net asset value
plus an initial sales charge (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 are 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.
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the
Fund's independent auditors given upon their authority, as experts in
accounting and auditing. The Fund's current independent auditors are Deloitte
& Touche LLP.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Class A and Class B Shares
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1995 1994 1993<F1> 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ......................... $ 7.96 $ 8.94 $ 9.11 $ 7.96 $ 8.93 $ 8.88
------ ------ ------ ------ ------ ------
Income from investment operations<F4> --
Net investment income ......................................... $ 0.57 $ 0.59 $ 0.11 $ 0.48 $ 0.47 $ 0.47
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ................................ 0.61 (0.95) (0.17) 0.61 (0.92) 0.26
------ ------ ------ ------ ------ ------
Total from investment operations ............................ $ 1.18 $(0.36) $(0.06) $ 1.09 $(0.45) $ 0.73
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .................................... $(0.55) $ -- $(0.09) $(0.47) $ -- $(0.45)
From net realized gain on investments and foreign currency
transactions ................................................. -- -- (0.02) -- -- (0.16)
Tax return of capital ......................................... -- (0.62) -- -- (0.52) (0.07)
------ ------ ------ ------ ------ ------
Total distributions declared to shareholders ................ $(0.55) $(0.62) $(0.11) $(0.47) $(0.52) $(0.68)
------ ------ ------ ------ ------ ------
Net asset value -- end of period ............................... $ 8.59 $ 7.96 $ 8.94 $ 8.58 $ 7.96 $ 8.93
====== ====== ====== ====== ====== ======
Total return<F6> ............................................... 15.40% (4.27)% (0.66)%<F3> 14.12% (5.24%) 8.42%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses<F5> .................................................. 1.14% 1.18% 1.22%<F2> 2.23% 2.22% 2.15%
Net investment income ......................................... 6.81% 7.10% 6.43%<F2> 5.79% 5.60% 5.19%
PORTFOLIO TURNOVER ............................................. 275% 211% 376% 275% 211% 376%
NET ASSETS AT END OF PERIOD (000 OMITTED) ...................... $12,659 $3,432 $ 258 $232,312 $292,619 $466,955
<FN>
- ----------
<F1> For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
<F2> Annualized.
<F3> Not annualized.
<F4> Per share data for the periods subsequent to November 30, 1992 is based on average shares outstanding.
<F5> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
<F6> 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS -- CONTINUED
Class B Shares
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1992 1991 1990 1989 1988**
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ........................ $ 9.31 $ 9.23 $ 9.50 $ 9.77 $ 9.47
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ........................................ $ 0.62 $ 0.58 $ 0.59 $ 0.68 $ 0.35
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ............................... (0.26) 0.32 (0.02) (0.08) 0.10
------ ------ ------ ------ ------
Total from investment operations ........................... $ 0.36 $ 0.90 $ 0.57 $ 0.60 $ 0.45
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ................................... $(0.57) $(0.56) $(0.45) $(0.85) $(0.12)
From net realized gain on investments and foreign currency
transactions ................................................ (0.15) (0.14) -- (0.02) (0.03)
From paid-in capital ......................................... (0.07) (0.12) (0.39) -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders ............... $(0.79) $(0.82) $(0.84) $(0.87) $(0.15)
------ ------ ------ ------ ------
Net asset value -- end of period .............................. $ 8.88 $ 9.31 $ 9.23 $ 9.50 $ 9.77
====== ====== ====== ====== ======
Total return .................................................. 3.93% 10.30% 6.59% 6.60% 14.21%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ..................................................... 2.20% 2.24% 2.33% 2.47% 2.79%+
Net investment income ........................................ 6.70% 6.65% 6.80% 7.13% 17.14%+
PORTFOLIO TURNOVER ............................................ 372% 603% 579% 433% 120%
NET ASSETS AT END OF PERIOD (000 OMITTED) ..................... $347,588 $196,753 $126,245 $75,039 $30,858
<FN>
- ----------
**For the period from the commencement of investment operations, August 1, 1988 to November 30, 1988.
+Annualized.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund seeks to preserve capital and provide high
current income.
INVESTMENT POLICIES -- The Fund seeks to achieve its objective 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"). Under normal market
conditions, the Fund's average weighted portfolio maturity will not be less
than three years. The Fund intends to 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. 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.
Under normal circumstances, at least 65% of the assets of the Fund will be
invested in income producing securities.
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 B 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 Service ("S&P") or by Fitch
Investors Services, Inc. ("Fitch") 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. For a description of these and other rating
categories, see Appendix C. 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 -- Foreign
Securities" 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). See "Investment Techniques -- Emerging Markets
Securities" below.
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.
5. INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following investment techniques, many of which are described
more fully in the SAI. See "Investment Techniques" in the SAI.
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities.
Such loans will usually be made only to member banks of the Federal Reserve
System and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government Securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would continue to collect the
equivalent of the interest on the securities loaned and would also receive
either interest (through investment of cash collateral) or a fee (if the
collateral is U.S. Government Securities or a letter of credit).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures which are
intended to minimize risk.
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 liquid and thus not subject to the Fund's limitation
on investing not more than 15% of its net assets in illiquid investments. The
Board of Trustees has adopted guidelines and delegated to the Adviser the
daily function of determining and monitoring the liquidity of Rule 144A
securities. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations. The Board will carefully
monitor the Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of decreasing the
level of liquidity in 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.
INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of unusual
market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of the Fund may be invested in
cash 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 D to this Prospectus for a description of certain short-term
investments.
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.
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 SAI 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.
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 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 SAI.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low-to
middle-income economy according to the International Bank for Reconstruction
and Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets.
The Adviser determines whether an issuer's principal activities are located in
an emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source
of its revenues and assets. The issuer's principal activities generally are
deemed to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies,
authorities or instrumentalities; (b) the issuer is organized under the laws
of, and maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives
50% or more of its total revenues from goods sold or services performed in
that country; or (e) the issuer has 50% or more of its assets in that country.
See "Additional Risk Factors -- Emerging Market Securities".
BRADY BONDS: The Fund may invest in Brady bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria,
Panama, the Philippines, Poland, Uruguay and Venezuela. Brady bonds have been
issued only recently, 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.
SWAPS AND RELATED TRANSACTIONS -- As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party
of cash payments based upon different interest rate indexes, currencies, and
other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Fund might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the counterparty selling such interest rate cap. The sale of an interest rate
floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses
if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI 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 SAI, which should be read in conjunction with
the following section.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call and put
options and purchase call and put options on securities. The Fund will write
options on securities for the purpose of increasing its return on such
securities and/or to protect the 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.
The Fund may also enter into options on the yield "spread", or yield
differential between two securities, a transaction referred to as a "yield
curve" option, for hedging or non-hedging purposes. In contrast to other types
of options, a yield curve option is based on the difference between the yields
of designated securities rather than the actual prices of the individual
securities. Yield curve options written by the Fund will be covered but could
involve additional risks.
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.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Investment Techniques" in the SAI.
FIXED INCOME SECURITIES: 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. 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.
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.
FOREIGN SECURITIES: 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.
EMERGING MARKETS SECURITIES: 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.
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 SAI, which could increase the
risks incurred by the Fund in entering into such transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S.
exchanges regulated by the Commodity Futures Trading Commission (the "CFTC")
and on foreign exchanges. The securities underlying options and Futures
Contracts traded by the Fund may include domestic as well as foreign
securities. Investors should recognize that transactions involving foreign
securities or foreign currencies, and transactions entered into in foreign
countries, may involve considerations and risks not typically associated with
investing in U.S. markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk
and could result in losses which are not offset by gains on other portfolio
assets. For example, the Fund may sell Futures Contracts on an index of
securities in order to profit from any anticipated decline in the value of the
securities comprising the underlying index. In such instances, any losses on
the Futures transaction will not be offset by gains on any portfolio
securities comprising such index, as might occur in connection with a hedging
transaction. The risks related to transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts entered into by the Fund
are set forth in greater detail in the SAI, which should be reviewed in
conjunction with the foregoing discussion.
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 B.
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.
NON-DIVERSIFICATION: 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.
PORTFOLIO TRADING: The Fund intends to manage its portfolio by buying and
selling securities to help attain its investment objective. This may result in
increases or decreases in the Fund's current income available for distribution
to the Fund's shareholders and in the holding by the Fund of debt securities
which sell at moderate to substantial premiums or discounts from face value.
The Fund will engage in portfolio trading if it believes a transaction, net of
costs (including custodian charges), will help in attaining its investment
objective. (See "Portfolio Transactions and Brokerage Commissions" in the
SAI.) For the fiscal year ended November 30, 1995, the Fund had a portfolio
turnover rate in excess of 100%. Transaction costs incurred by the Fund and
the realized capital gains and losses of the Fund may be greater than that of
a fund with a lesser portfolio turnover rate.
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 SAI.
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993, as amended (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Steven E. Nothern, a Senior
Vice President of the Adviser, has been employed as a portfolio manager by the
Adviser since 1989 and has been one of the Fund's portfolio managers since
1992. Christopher D. Piros, a Vice President of the Adviser, has been employed
as a portfolio manager by the Adviser as a portfolio manager since 1992 and
has been one of the Fund's portfolio managers since January 31, 1996. 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, 1995, MFS, received management
fees under the Fund's Advisory Agreement of $2,071,032.
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 various 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 $43.9 billion on behalf of approximately 1.9 million investor
accounts as of February 29, 1996. As of such date, the MFS organization
managed approximately $1.2 billion of assets invested in equity securities and
approximately $20 billion of assets invested in fixed income securities.
Approximately $3.8 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of
U.S. issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn
is a wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold
D. Scott, John D. McNeil and 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.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment
management in 1868, and HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG),
the oldest publicly listed bank in Germany, founded in 1835. As part of this
alliance, the portfolio managers and investment analysts of MFS and Foreign &
Colonial will share their views on a variety of investment related issues,
such as the economy, securities markets, portfolio securities and their
issuers, investment recommendations, strategies and techniques, risk analysis,
trading strategies and other portfolio management matters. MFS will have
access to the extensive international equity investment expertise of Foreign &
Colonial, and Foreign & Colonial will have access to the extensive U.S. equity
investment expertise of MFS. One or more MFS investment analysts are expected
to work for an extended period with Foreign & Colonial's portfolio managers
and investment analysts at their offices in London. In return, one or more
Foreign & Colonial employees are expected to work in a similar manner at MFS'
Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial,
particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in
other cases, however, it may produce increased investment opportunities for
the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer and other financial institutions ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to
investments in the Fund.
The Fund offers two classes of shares (Class A and B shares) which bear sales
charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
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** None** See Below**
<FN>
- ----------
*Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated using
the percentages above.
**A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge).
In the following two circumstances, Class A shares are also offered at net
asset value without an initial sales charge but subject to a CDSC, equal to 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates 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.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
---------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus.
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption as follows:
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%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee payable under the Fund's Class B Distribution Plan (see
"Distribution Plans" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of
Class B shares is 4% of the purchase price of the shares (commission rate of
3.75% plus a service fee equal to 0.25% of the purchase price).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus.
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. See "Distribution Plans" below. However, for
purposes of conversion to Class A shares, all shares in a shareholder's
account that were purchased through the reinvestment of dividends and
distributions paid in respect of Class B shares (and which have not converted
to Class A shares as provided in the following sentence) will be held in a
separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to
Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bears to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B
shares would continue to be subject to higher expenses than Class A shares for
an indefinite period.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject 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 shares 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.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A and Class B shares. In addition, from time to
time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD,
at its expense, may provide additional commissions, compensation or
promotional incentives ("concessions") to dealers which sell shares of the
Fund. Such concessions provided by MFD may include financial assistance to
dealers in connection with preapproved conferences or seminars, sales or
training programs for invited registered representatives, payment for travel
expenses, including lodging, incurred by registered representatives for such
seminars or training programs, seminars for the public, advertising and sales
campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RETIREMENT PLAN ACCOUNTS. Following the termination of any agreement
between a plan sponsor and the Shareholder Servicing Agent or its affiliates
with respect to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing Agent, the
Shareholder Servicing Agent shall combine all plan participant accounts into a
single omnibus or pooled account for each Fund in which the plan invests.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting,
selling or distributing securities. Although the scope of the prohibition has
not been clearly defined, MFD believes that such Act should not preclude banks
from entering into agency agreements with MFD. If, however, a bank were
prohibited from so acting, the Trustees would consider what actions, if any,
would be necessary to continue to provide efficient and effective shareholder
services in respect of Shareholders who invested in the Fund through a
national bank. It is not expected that shareholders would suffer any adverse
financial consequence as a result of these occurrences. In addition, state
securities laws on this issue may differ from the interpretation of federal
law expressed herein and banks and financial institutions may be required to
register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e.,
an established account) may be exchanged for shares of the same class of any
of the other MFS Funds at net asset value (if available for sale).
EXCHANGES AMONG MFS FUNDS (EXCLUDING MFS MONEY MARKET FUNDS): No initial sales
charges or CDSC will be imposed in connection with an exchange from shares of
an MFS Fund to shares of any other MFS Fund, except with respect to exchanges
from an MFS money market fund to another MFS Fund which is not an MFS money
market fund (discussed below). With respect to an exchange involving shares
subject to a CDSC, the CDSC will be unaffected by the exchange and the holding
period for purposes of calculating the CDSC will carry over to the acquired
shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between Class A shares subject to a CDSC and Units, the
CDSC will carry over to the acquired shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth above in this paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before
making any exchange. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established
account by the Shareholder Servicing Agent in proper form (i.e., if in writing
- -- signed by the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or
shareholder of record) and each exchange must involve either shares having an
aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by
the Shareholder Servicing Agent) or all the shares in the account. If an
Exchange Request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the New York Stock
Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"), the exchange
will occur on that day if all the requirements set forth above have been
complied with at that time and subject to the Fund's right to reject purchase
orders. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to
most non-retirement plan accounts and certain retirement plan accounts. For
further information regarding exchanges by telephone, see "Redemptions by
Telephone." The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers. 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 --
General -- Right to Reject Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on
any date on which the Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however,
subject to a CDSC. See "Contingent Deferred Sales Charge" below. Because the
net asset value of shares of the account fluctuates, redemptions or
repurchases, which are taxable transactions, are likely to result in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800) 225-
2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a bank
and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee." The proceeds of such a
redemption, reduced by the amount of any applicable CDSC and the amount of any
income tax required to be withheld, are mailed by check to the designated
account, without charge, if the redemption proceeds do not exceed $1,000, and
are wired in federal funds to the designated account if the redemption
proceeds exceed $1,000. If a telephone redemption request is received by the
Shareholder Servicing Agent by the close of regular trading on the Exchange on
any business day, shares will be redeemed at the closing net asset value of
the Fund on that day. Subject to the conditions described in this section,
proceeds of a redemption are normally mailed or wired on the next business day
following the date of receipt of the order for redemption. The Shareholder
Servicing Agent 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.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
REDEMPTION BY CHECK: Only Class A 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" below, 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, PLUS ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME
TAX REQUIRED TO BE WITHHELD IS GREATER THAN THE VALUE OF CLASS A SHARES HELD
IN THE SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE RETURNED UNPAID, AND THE
SHAREHOLDER MAY BE SUBJECT TO EXTRA CHARGES. TO AVOID DISHONOR OF CHECKS DUE
TO FLUCTUATIONS IN ACCOUNT VALUE, SHAREHOLDERS ARE ADVISED AGAINST REDEEMING
ALL OR MOST OF THEIR ACCOUNT BY CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A
FUND ACCOUNT BECAUSE WHEN THE CHECK IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW
THE EXACT TOTAL VALUE OF THE ACCOUNT ON THE DAY THE CHECK CLEARS. There is
presently no charge to the shareholder for the maintenance of this special
account or for the clearance of any checks, but the Fund and the Bank reserve
the right to impose such charges or to modify or terminate the redemption by
check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("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 purchases by
certain retirement plans 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 of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed
without charge ("Free Amount"). Moreover, no CDSC is ever assessed on
additional shares acquired through the automatic reinvestment of dividends or
capital gain distributions ("Reinvested Shares"). Therefore, at the time of
redemption of a particular class, (i) any Free Amount is not subject to the
CDSC and (ii) the amount of the redemption equal to the then-current value of
Reinvested Shares is not subject to the CDSC, but (iii) any amount of the
redemption in excess of the aggregate of the then-current value of Reinvested
Shares and the Free Amount is subject to a CDSC. The CDSC will first be
applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to
all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. Subject to 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
securities (instead of cash) from the Fund's portfolio. The securities
distributed in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment
in such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
See "Purchases -- General -- Minimum Investment." Shareholders will be
notified that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
DISTRIBUTION 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 "Distribution Plans"), after having concluded that there is a reasonable
likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below have not yet been imposed
or are being waived. These circumstances are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A and
Class B shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom
such dealer is the dealer or holder of record. MFD may from time to time
reduce the amount of the service fees paid for shares sold prior to a certain
date. Service fees may be reduced for a dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having an aggregate net
asset value at or above a certain dollar level. Dealers may from time to time
be required to meet certain criteria in order to receive service fees. MFD or
its affiliates are entitled to retain all service fees payable under each
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to
the Designated Class as partial consideration for distribution services
performed and expenses incurred in the performance of MFD's obligations under
its distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the
use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the separate Distribution Plans. While the amount
of compensation received by MFD in the form of distribution fees during any
year may be more or less than the expense incurred by MFD under its
distribution agreement with the Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution agreement
with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The Distribution Plans have substantially identical provisions with
respect to their operating policies and their initial approval, renewal,
amendment and termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered with an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (and the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets
attributable to Class A shares. As noted above, MFD may use the distribution
fee to cover distribution-related expenses incurred by it under its
distribution agreement with the Fund, including commissions to dealers and
payments to wholesalers employed by MFD (e.g., MFD pays commission to dealers
with respect to purchases of $1 million or more of Class A shares which are
sold at net asset value but which are subject to a 1% CDSC for one year after
purchase). Distribution fee payments under the Class A Distribution Plans may
be used by MFD to pay securities dealers a distribution fee in an amount equal
on an annual basis to 0.25% per annum of each Fund's average daily net assets
attributable to Class A shares (other than Class A shares that have converted
from Class B shares) owned by investors for whom that securities dealer is the
holder or dealer of record. See "Purchases -- Class A Shares" above. In
addition, to the extent that the aggregate service and distribution fees paid
under the Class A Distribution Plan do not exceed 0.35% per annum of the
average daily net assets of the Fund attributable to Class A shares, the Fund
is permitted to pay such distribution-related expenses or other distribution-
related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases --
Class B Shares" above. MFD will advance to dealers the first year service fee
described above at a rate equal to 0.25% of the purchase price of such shares
and, as compensation therefore, MFD may retain the service fee paid by the
Fund with respect to such shares for the first year after purchase. Dealers
will become eligible to receive the ongoing 0.25% per annum service fee with
respect to such shares commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may be
used by MFD to cover its distribution-related expenses under its distribution
agreement with the Fund (including the 3.75% commission it pays to dealers
upon purchase of Class B shares, as described under "Purchases -- Class B
Shares" above).
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A and Class B
distribution and service fees for its current fiscal year are 0.00% and 1.00%
per annum, respectively. Payment of the 0.10% per annum Class A distribution
fee will commence on such date as the Trustees of the Trust may determine.
Payment of the 0.25% per annum Class A service fee will commence on the date
that the net assets attributable to Class A shares first equal or exceed $40
million.
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 U.S. Government
Securities (but generally not from capital gains realized upon a disposition
of such securities) 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 intangibles tax or
a personal property tax on all or a portion of the value of their shares.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that 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.
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
treaty. The Fund is also required in certain circumstances to apply backup
withholding at a rate of 31% on taxable dividends and redemption proceeds paid
to any shareholder (including a shareholder who is neither a citizen nor a
resident of the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments that have been subject to
30% withholding. 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 SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value per share of
each class of shares is effective for orders received by the dealer prior to
its calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of 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 SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above 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 SAI. For further
information about the Fund's performance for the fiscal year ended November
30, 1995, 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.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account.
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 SAI) 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 the MFS Fixed Fund (a bank collective investment fund) within a
13-month period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares 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, 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 if such fund is available for sale. 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 SAI for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital
gain and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class 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 SAI, dated April 1, 1996, 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
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares is waived
(Section II), and the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of
Class A shares and on redemptions of Class B shares, as applicable, is
waived:
1. DIVIDEND REINVESTMENT
* Shares acquired through dividend or capital gain reinvestment; and
* Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
* Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
* Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life Assurance Company of Canada
("Sun Life") or any of their subsidiary companies;
* Trustees and retired trustees of any investment company for which
MFD serves as distributor;
* Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
* Employees or registered representatives of dealers and other
financial institution ("dealers") which have a sales agreement with
MFD;
* Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
* Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI")
AMI.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
* Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases --
General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
* Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
* Death, disability or retirement of Plan participant;
* Loan from Plan (repayment of loans, however, will constitute new
sales for purposes of assessing sales charges);
* Financial hardship (as defined in Treasury Regulation Section 1.401
(k)-1(d)(2), as amended from time to time);
* Termination of employment of Plan participant (excluding, however, a
partial or other termination of the Plan);
* Tax-free return of excess Plan contributions;
* To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS
FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent; and
* Distributions from a Plan that has invested its assets in one or
more of the MFS Funds for more than 10 years from the later to occur
of: (i) January 1, 1993 or (ii) the date such Plan first invests
its assets in one or more of the MFS Funds. The sales charges will
be waived in the case of a redemption of all of the Plan's shares in
all MFS Funds (i.e., all the assets of the Plan invested in the MFS
Funds are withdrawn), unless immediately prior to the redemption,
the aggregate amount invested by the Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the Plan's assets in
the MFS Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
* Death or disability of Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
* To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
* From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants of such Plan, provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares is waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
* Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or
managed by MFD or its affiliates if: (i) the investment is made
through a dealer and appropriate documentation is submitted to MFD;
(ii) the redeemed shares were subject to an initial sales charge or
deferred sales charge (whether or not actually imposed); (iii) the
redemption occurred no more than 90 days prior to the purchase of
Class A shares; and (iv) the MFS Fund, MFD or its affiliates have
not agreed with such company or its affiliates, formally or
informally, to waive sales charges on Class A shares or provide any
other incentive with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
* Shares acquired by investments through certain dealers which have
entered into an agreement with MFD which includes a requirement that
such shares be sold for the sole benefit of clients participating in
a "wrap" account or a similar program under which such clients pay a
fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
* Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
* Shares acquired by retirement plans whose third party
administrators, or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
* Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
* Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
* Tax-free returns of excess IRA contributions.
401(A) PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old; and
* Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
* Distributions made on or after the Plan participant has attained the
age of 59 1/2 years old.
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
* Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
* Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
* Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification form
is required to be submitted to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
* Distributions made on or after the IRA owner or the Plan
participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION ON SIMPLIFIED EMPLOYEE REDUCTION PLANS ("SAR-SEP
PLANS")
* Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
* Death or disability of a SAR-SEP Plan participant.
<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>
APPENDIX C
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt instruments
with the same maturity, coupon and rating may have different yields while debt
instruments of the same maturity and coupon with different ratings may have
the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or 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 SERVICE
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 D
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
Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA02110
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) INTERMEDIATE INCOME FUND
500 Boylston Street
Boston, MA 02116
Mii-1-4/96/44.5M 5/205
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) INTERMEDIATE INCOME FUND
Prospectus
April 1, 1996
<PAGE>
MFS(R) INTERMEDIATE STATEMENT OF
INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) April 1, 1996
- ----------------------------------------------------------------------------
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 .............................................. 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 ..................................... 17
Tax-Deferred Retirement Plans .......................... 18
7. Tax Status ................................................ 18
8. Determination of Net Asset Value; Performance Information . 19
9. Distribution Plans ........................................ 21
10. Description of Shares, Voting Rights and Liabilities ...... 22
11. Independent Auditors and Financial Statements ............. 23
Appendix A ................................................ 24
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"), as amended or supplemented
from time to time, sets forth information which may be of interest to investors
but which is not necessarily included in the Fund's Prospectus, dated April 1,
1996. 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 of the Fund, dated April 1, 1996,
as amended or supplemented from time to time.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment techniques 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, U.S. Government securities or an irrevocable letter of credit
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of cash collateral or a fee. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially. However, the loans would be
made only to firms deemed by the Adviser to be of good standing, and when, in
the judgment of the Adviser, the consideration which could be earned currently
from securities loans of this type justifies the attendant risk. If the Adviser
determines to make securities loans, it is not intended that the value of the
securities loaned would exceed 20% of the value of the Fund's total assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have cash, short-term money market instruments or high quality
debt securities sufficient to cover any commitments or to limit any potential
risk. However, although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to 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
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 counterparty with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the 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.
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. Because these securities are traded over-the-counter, the SEC has
taken the position that yield curve options are illiquid and, therefore, cannot
exceed the SEC liquidity ceiling. See "Policies on the Use of Futures, Options
and Options on Futures Contracts" below for a discussion of the policies the
Adviser intends to follow to limit the Fund's investment in these securities.
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
Commodities Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or securities in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
cash, short-term money market instruments or high quality debt securities in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
where the exercise price of the put held is less than the exercise price of the
put written if the difference is maintained by the Fund in cash, short-term
money market instruments or high quality debt securities in a segregated account
with its custodian. Put and call Options on Futures Contracts may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations. Upon
the exercise of a call Option on a Futures Contract written by the Fund, the
Fund will be required to sell the underlying Futures Contract which, if the Fund
has covered its obligation through the purchase of such Contract, will serve to
liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by the Fund is exercised, the Fund will be required to purchase
the underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The writing of a call Option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. If
the futures price at expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put Option on a Futures
Contract constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures Contracts
may to some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes instead
of purchasing or selling the underlying Futures Contracts. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, the Fund
could, in lieu of selling Futures Contracts, purchase put options thereon. In
the event that such decrease occurs, it may be offset, in whole or 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 forego 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 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 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, OPTIONS 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 leveraging effect of such futures is minimized.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized as such by the
Federal Reserve Bank of New York. Also, the contracts the Fund has in place with
such primary dealers provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula generally is based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any of
the option's intrinsic value (i.e., the amount that the option is in-the-money).
The formula may also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written out-of-the-money. The Fund will treat all or a portion of the formula as
illiquid for purposes of the SEC illiquidity ceiling test imposed by the SEC
staff. The Fund may also write over-the-counter options with non-primary
dealers, including foreign dealers (where applicable), and will treat the assets
used to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
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 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 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. Also, the Fund will not 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. The Fund also may not invest more than
5% of the value of the Fund's net assets, valued at the lower of cost or market,
in warrants. Included within such amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchange. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
These operating policies are not fundamental and may be changed without
shareholder approval.
PORTFOLIO TURNOVER
For the fiscal years ended November 30, 1994 and 1995 the rates of portfolio
turnover for the Fund were 211% and 275%, respectively. A higher turnover rate
necessarily involves greater expense to the Fund and could involve realization
of capital gains that would be taxable to the shareholders. The Fund will engage
in portfolio trading if it believes that a transaction, net of costs (including
custodian transaction charges), will help in achieving its investment objective.
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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director.
MARSHALL N. COHAN
Private Investor.
Address: 2524 Bedford Mews Drive, Wellington, Florida.
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery.
Address: 75 Francis Street, Boston, Massachusetts.
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield
& Son Ltd., Chairman.
Address: 21 Reid Street, Hamilton, Bermuda.
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director.
Address: 30 Rockefeller Plaza, Room 5600, New York, New York.
WALTER E. ROBB, III
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee.
Address: 110 Broad Street, Boston, Massachusetts.
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary.
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President.
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President.
Address: One Liberty Square, Boston, Massachusetts.
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company) Director (prior to April 1992); Society
National Bank (commercial bank); Director (prior to April 1992).
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio.
OFFICERS
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.
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel.
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President.
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*"Interested persons" (as defined in the Investment Company Act of 1940 (the
"1940 Act") of the Adviser, whose address is 500 Boylston Street, Boston,
Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 75 and if the
Trustee has completed at least five years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 75 and receive
reduced payments if he has completed at least five years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for Messrs. Brodkin, Scott and
Shames. The Fund will accrue its allocable share of compensation expenses each
year to cover current years service and amortize past service cost.
As of February 29, 1996, the Trustees and officers, as a group, owned less than
1% of the outstanding shares of the Fund. As of February 29, 1996, Walter E.
Ziebarth Jr. and Marjorie B. Ziebarth, JTWROS, P.O. Box 6237, Fort Myers Beach,
FL 33932-6237 was the record owner of approximately 5.04% of the outstanding
Class A shares of the Fund. As of February 29, 1996, Bank of America, Trustee,
J.G. Boswell Co., Profit Sharing Plan, P.O. Box 3577, Los Angeles, California
90051-1577 was the record owner of approximately 41.49% of the outstanding Class
A shares of the Fund. As of February 29, 1996, Merrill Lynch, Pierce, Fenner &
Smith Inc., P.O. Box 45286, Jacksonville, FL 32232- 5286 was the record owner of
approximately 5.18% of the outstanding Class B shares of the Fund.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable under the retirement plan.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which 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 September 1, 1993, as amended (the "Advisory
Agreement"). The Adviser provides the Fund with overall investment advisory and
administrative services, as well as general office facilities. Subject to such
policies as the Trustees may determine, the Adviser makes investment decisions
for the Fund. For these services and facilities, the Adviser receives a
management fee, computed and paid monthly, in an amount equal to the sum of .32%
of the Fund's average daily net assets plus 5.65% of its daily gross income for
its then-current fiscal year (i.e., income other than gains from the sale of
securities, gains from options and futures transactions, premium income from
options written and gains from foreign exchange transactions).
For the Fund's fiscal year ended November 30, 1993, the Fund's current
investment adviser, MFS, together with Lifetime Advisers, Inc., a wholly owned
subsidiary of MFS, received in aggregate $3,389,211 under their investment
advisory agreements with the Fund. For the Fund's fiscal year ended November 30,
1994, MFS received $2,849,997 under its investment advisory agreement. For the
Fund's fiscal year ended November 30, 1995, MFS received $2,071,032 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 the Fund's expenses (other than those assumed by the
Adviser or MFD) including: Trustees fees discussed above; governmental fees;
interest charges; taxes; membership dues in the Investment Company Institute
allocable to the Fund; fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
the Fund; expenses of repurchasing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing share
certificates, periodic reports, notices and proxy statements to shareholders and
to governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the Fund's Custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses are borne by the Fund except that the Fund's Distribution Agreement
with MFD requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific series
are allocated among the series in a manner believed by management of the Trust
to be fair and equitable. Payment by the Fund of brokerage commissions for
brokerage and research services of value to the Adviser in serving its clients
is discussed under the caption "Portfolio Transactions and Brokerage
Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions and, in general, administering its affairs (with the exception of
the services, facilities and personnel provided by the Shareholder Servicing
Agent or the Custodian, see below).
The Advisory Agreement with the Fund will remain in effect until August 1, 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 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 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, as amended (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% of assets attributable to
Class A and Class B shares, respectively. In addition, the Shareholder Servicing
Agent will be reimbursed by the Fund for certain expenses incurred by the
Shareholder Servicing Agent on behalf of the Fund. 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 the Right of Accumulation) by any person,
including members of a family unit (e.g., husband, wife and minor children) and
bona fide trustees, and also applies to purchases made under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal Programs" in
this SAI). A group might qualify to obtain quantity sales charge discounts (see
"Investment and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain 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 4% 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 year ended November 30, 1994, MFD received sales charges of $7,840
and dealers received sales charges of $57,508 (as their concession on gross
sales charges of $65,348) for selling Class A shares of the Fund; the Fund
received $3,061,927 representing the aggregate net asset value of such shares.
During the fiscal year ended November 30, 1995, MFD received sales charges of
$1,929 and dealers received sales charges of $11,551 (as their concession on
gross sales charges of $13,480) for selling Class A shares of the Fund. The Fund
received $731,149 representing the aggregate net asset value of such shares.
During the fiscal years ended November 30, 1995, 1994 and 1993, the CDSC imposed
on redemption of Class A shares were $1,884, $0 and $0, respectively.
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, 1995, 1994 and 1993, the CDSC imposed
on redemption of Class B shares were approximately $875,000, $1,682,000, and
$1,436,000, 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
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $23,100 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 years ended November 30, 1995, 1994 and 1993, the Fund did
not pay any commissions on total transactions (other than U.S. Government
securities, purchased options transactions and short-term obligations). Most of
the Fund's transactions are principal transactions and thus do not 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 by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, it is believed that the Fund's ability to
participate in volume transactions will produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with all classes of shares of other MFS Funds or MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period in the case of purchases of $1 million or more), the shareholder
may obtain Class A shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by completing the Letter of
Intent section of the 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
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 one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100 except in certain limited circumstances. The
aggregate withdrawals of Class B shares made in any year pursuant to a SWP
generally are limited to 10% of the value of the account at the time of 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 "Redemption and Repurchase of Shares
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 $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A shares,
maintaining a withdrawal plan concurrently with an investment program would be
disadvantageous because of the sales charges included in share purchases and the
imposition of a CDSC on certain redemptions. The shareholder may deposit into
the account additional shares of the Fund, change the payee or change the amount
of each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be made
at any time 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 or may exchange their shares for the same class of shares
of the other MFS Funds if available for sale under the Automatic Exchange Plan.
The Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to 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 exchange until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange--Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of the month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of other
MFS Funds (except 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 of reinvested
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in the same class of shares of any of the MFS Funds (if
shares of the fund are available for sale) at net asset value (without a sales
charge) and, if applicable, with credit for any CDSC paid. In the case of
proceeds reinvested in 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 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 on any business day prior to the close of regular
trading on the Exchange, the Exchange usually will occur on that day if all of
the requirements and restrictions 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
the Shareholder Servicing Agent may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
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.
No CDSC is imposed on exchanges, 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 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.
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 ordinary income and any distributions from
net short-term capital gains (whether paid in cash or reinvested in additional
shares) are taxable to shareholders as ordinary income for federal income tax
purposes. Because the Fund expects to earn primarily interest income, it is
expected that no Fund dividends will qualify for the dividends received
deduction for corporations. Distributions of net capital gains (i.e., the excess
of net long-term capital gains over net short-term capital losses), whether
received in cash or reinvested 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, payable to shareholders of record in
such a month, and paid the following January, will be taxable to shareholders as
if received on December 31 of the year in which they are declared. The Fund will
notify shareholders regarding the federal tax status of its distributions
shortly after the end of each calendar year.
Any distribution will have the effect of reducing the per share net asset value
of shares in the Fund by the amount of the distribution. Shareholders purchasing
shares shortly before the record date of any distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon 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) without
payment of an additional sales charge of Class A shares of the Fund or of
another MFS Fund (or other shares of an MFS Fund generally sold subject to a
sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investment in zero coupon securities, stripped securities and certain
securities purchased at a market discount will cause it to realize income prior
to the receipt of cash payments with respect to those securities. In order to
distribute this income and avoid a tax on the Fund, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Fund.
An investment in residual interests of a CMO that has elected to be treated as a
real estate mortgage investment conduit, or "REMIC", can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
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 such positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles", and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, Forward
Contracts, and swaps and related transactions, to the extent necessary to meet
the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies and
investment by the Fund in certain "passive foreign investment companies" may be
limited in order to avoid a tax on the Fund.
Investment income received by the Fund from 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 at a rate of 31% on taxable dividends and redemption proceeds paid
to any shareholder (including a Non-U.S. Person) who does not furnish to the
Fund certain information and certifications or who is otherwise subject to
backup withholding. Backup withholding will not however, be applied to payments
that have been subject to 30% withholding. Distributions received from the Fund
by Non-U.S. Persons may also be subject to tax under the laws of their own
jurisdictions.
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.
Residents of certain states may be subject to an intangibles tax or a personal
property tax on all or a portion of the value of their shares of the Fund.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes in certain states. The Fund intends to advise
shareholders of the extent, if any, to which its distributions consist of such
interest. Shareholders are urged to consult their tax advisers regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes as well as regarding the tax consequences of an investment in the
Fund.
8. 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 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
TOTAL RETURN: The Fund will calculate its total rate of return for each class of
shares for certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000 (made with
all distributions reinvested and reflecting the CDSC or the maximum public
offering price) to reach the value of that investment at the end of the periods.
The Fund may also calculate (i) a total rate of return, which is not reduced by
the CDSC (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) 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 (4.75% 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 for the five-year periods ended November 30, 1995 and for
the period from commencement of operations on August 1, 1988 through November
30, 1995 was 10.12%, 5.80% and 6.60%, respectively. The average annual total
rate of return for Class B shares, not giving effect to the CDSC, for the same
periods was 14.12%, 6.09% and 6.60%, respectively.
The average annual total rate of return for Class A shares for the one-year
period ended November 30, 1995 and for the period from the commencement of
operations on September 7, 1993 to November 30, 1995 was 9.88% and 2.03%
(including the effect of the sales charge) and 15.40% and 4.26%, respectively
(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 August 1,
1988 through December 31, 1995. It has been assumed that dividend and capital
gain distributions were reinvested in additional shares. Any performance results
or total rate of return quotation provided by the Fund should not be considered
as representative of the performance of the Fund in the future since the net
asset value of shares of the Fund will vary based not only on the type, quality
and maturities of the securities held in the Fund's portfolio, but also on
changes in the current value of such securities and on changes in the expenses
of the Fund. These factors and possible differences in the methods used to
calculate total rates of return should be considered when comparing the total
rate of return of the Fund to total rates of return published for other
investment companies or other investment vehicles. Total rate of return reflects
the performance of both principal and income. Current net asset value and
account balance information may be obtained by calling 1- 800-MFS-TALK
(637-8255).
<TABLE>
<CAPTION>
MFS INTERMEDIATE INCOME FUND -- CLASS B
--------------------------------------------------------------
VALUE OF VALUE OF
INITIAL REINVESTED VALUE OF
$10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ---------- ---------- ------------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1988* .............................................. $10,116 $0 $ 309 $10,425
December 31, 1989 ............................................... 9,999 0 1,209 11,208
December 31, 1990 ............................................... 9,767 0 2,235 12,002
December 31, 1991 ............................................... 9,989 0 3,432 13,421
December 31, 1992 ............................................... 9,387 0 4,352 13,739
December 31, 1993 ............................................... 9,524 0 5,478 15,002
December 31, 1994 ............................................... 8,384 0 5,654 14,038
December 31, 1995 ............................................... 9,123 0 7,037 16,160
<FN>
- ----------
*For the period from the start of business, August 1, 1988, through December 31, 1988.
</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.
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class of the Fund over a
30-day period. The yield is calculated by dividing the net investment income per
share allocated to a particular class of the Fund earned during the period by
the maximum public offering price per share of such class on the last day of
that period. The resulting figure is then annualized. Net investment income per
share of a class is determined by dividing (i) the dividends and interest earned
by the Fund allocated to that class during the period, minus accrued expenses of
such class for the period, by (ii) the average number of Fund shares of such
class entitled to receive dividends during the period multiplied by the maximum
public offering price per share of such class on the last day of the period. The
Fund's yield calculations for Class A shares assume a maximum sales charge of
4.75%. For Class B shares, the Fund's yield calculations assume no CDSC is paid.
The yield for Class B shares of the Fund for the 30-day period ended November
30, 1995 was 4.85%. The yield for Class A shares of the Fund for the 30-day
period ended November 30, 1995 was 5.63%.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past twelve months by the maximum public offering price of that class at the end
of such period. Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past twelve months. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income for option writing,
short-term capital gains and return of invested capital, and is calculated over
a different period of time. The Fund's current distribution rate calculation for
Class A shares assumes a maximum sales charge of 4.75%. The Fund's current
distribution rate calculation for Class B shares assumes no CDSC is paid. The
current distribution rate for Class A shares of the Fund for the twelve-month
period ended November 30, 1995 was 6.13%. The current distribution rate for
Class B shares of the Fund for the twelve-month period ended on November 30,
1995 was 5.48%.
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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks.
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 cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first-closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the first
trust to invest solely in companies deemed to be union-friendly by an
advisory board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
9. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A and Class B
shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that each Distribution Plan would benefit the Fund and the
respective class of shareholders. The Distribution Plans are designed to promote
sales, thereby increasing the net assets of the Fund. Such an increase may
reduce the Fund's expense ratio to the extent 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 Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time); or
(ii) to any insurance company which has entered into an agreement with the Fund
and MFD that permits such insurance company to purchase Class A shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from time
to time be required to meet certain other criteria in order to receive service
fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. MFD, however, may waive this minimum amount
requirement from time to time. Dealers may from time to time be required to meet
certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended November 30, 1995, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- ------------------ ------- ------ ----------
Class A Distribution Plan $ 0 $ 0 $ 0
Class B Distribution Plan $2,602,496 $62,367 $2,664,863
GENERAL: Each of the Distribution Plans 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 vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distributions Plans
entered into between the Fund or MFD and other organizations must be approved by
the Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans 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 three series, Class
A shares and Class B shares, as well as Class C Shares for one series. Each
share of a class of the Fund represents an equal proportionate interest in the
assets of the Fund allocable to that class. Upon liquidation of the Fund,
shareholders of each class are entitled to share pro rata in the net assets of
the Fund allocable to such class available for distribution to shareholders. The
Trust reserves the right to create and issue additional series or classes of
shares, in which case the shares of each class would participate equally in the
earnings, dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights (except as described in "Purchases -- Conversion of Class B Shares" in
the Prospectus). Shares are fully paid and non-assessable. The Trust may enter
into a merger or consolidation, or sell all or substantially all of its assets
(or all or substantially all of the assets belonging to any series of the
Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the 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 AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance with tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
The Portfolio of Investments at November 30, 1995, the Statement of Assets and
Liabilities at November 30, 1995, the Statement of Operations for the year ended
November 30, 1995, the Statement of Changes in Net Assets for each of the two
years in the period ended November 30, 1995, the Notes to Financial Statements
and the Independent Auditors' Report, each of which is included in the Annual
Report to shareholders of the Fund, are incorporated by reference into this SAI
and have been so incorporated in reliance upon the report of Deloitte & Touche
LLP, independent auditors, as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,725 $ 700 10 $263,815
A. Keith Brodkin --0-- --0-- N/A --0--
Marshall N. Cohan 4,175 1,514 13 148,624
Dr. Lawrence Cohn 3,725 350 18 135,874
Sir David Gibbons 3,725 1,277 13 135,874
Abby M. O'Neill 3,500 508 10 129,499
Walter E. Robb, III 4,175 1,514 13 148,624
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
J. Dale Sherratt 4,175 395 20 148,624
Ward Smith 4,175 626 13 148,624
<FN>
(1) For fiscal year ended November 30, 1995.
(2) Based on normal retirement age of 75.
(3) Information provided is for calendar year 1995. All Trustees receiving compensation served as Trustees of 36 funds within the
MFS fund complex (having aggregate net assets at December 31, 1995, of approximately $12.5 billion) except Mr. Bailey, who
served as Trustee of 73 funds within the MFS fund complex (having aggregate net assets at December 31, 1995, of approximately
$31.7 billion).
</FN>
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
YEARS OF SERVICE
--------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,150 $473 $ 788 $1,103 $1,575
3,439 516 860 1,203 1,719
3,727 559 932 1,304 1,864
4,016 602 1,004 1,405 2,008
4,304 646 1,076 1,506 2,152
4,593 689 1,148 1,607 2,296
<FN>
(4) 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 AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R) INTERMEDIATE
INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO] M F S (R)
THE FIRST NAME IN MUTUAL FUNDS
[recycle symbol] Printed on recycled paper. MII-13-4/96/500 5/205
<PAGE>
<PAGE>
{LOGO: M F S (R) ANNUAL REPORT FOR
THE FIRST NAME IN MUTUAL FUNDS] YEAR ENDED
NOVEMBER 30, 1995
MFS(R) INTERMEDIATE INCOME FUND
Front cover
A photo of the U.S. Capitol Building.
<PAGE>
<TABLE>
<S> <C>
MFS(R) INTERMEDIATE INCOME FUND
TRUSTEES SECRETARY
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor; ASSISTANT SECRETARY
Former Chairman and Director (until 1991), James R. Bordewick, Jr.*
Massachusetts Financial Services Company; CUSTODIAN
Director, Cambridge Bancorp; Director, State Street Bank and Trust Company
Cambridge Trust Company AUDITORS
Marshall N. Cohan - Private Investor Deloitte & Touche LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac INVESTOR INFORMATION
Surgery, Brigham and Women's Hospital; For MFS stock and bond market outlooks,
Professor of Surgery, Harvard Medical School call toll free: 1-800-637-4458 anytime from
The Hon. Sir J. David Gibbons, KBE - Chief a touch-tone telephone.
Executive Officer, Edmund Gibbons Ltd.; For information on MFS mutual funds,
Chairman, Bank of N.T. Butterfield & Son Ltd. call your financial adviser or, for an
Abby M. O'Neill - Private Investor; information kit, call toll free:
Director, Rockefeller Financial Services, Inc. 1-800-637-2929 any business day from
(investment adviser) 9 a.m. to 5 p.m. Eastern time (or leave
Walter E. Robb, III - President and Treasurer, a message anytime).
Benchmark Advisors, Inc. (corporate financial INVESTOR SERVICE
consultants); President, Benchmark Consulting MFS Service Center, Inc.
Group, Inc. (office services); Trustee, P.O. Box 2281
Landmark Funds (mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice For general information, call toll free:
President, Director and Secretary, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
J. Dale Sherratt - President, Insight Resources, day from 9 a.m. to 5 p.m. Eastern time.
Inc. (acquisition planning specialists) (To use this service, your phone must be
Ward Smith - Former Chairman (until 1994), equipped with a Telecommunications Device for
NACCO Industries; Director, Sundstrand the Deaf.)
Corporation For share prices, account balances and
INVESTMENT ADVISER exchanges, call toll free: 1-800-MFS-TALK
Massachusetts Financial Services Company (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc. ----------------------------------------------------
500 Boylston Street TOP-RATED SERVICE
Boston, MA 02116-3741 DALBAR For the second year in a
PORTFOLIO MANAGERS row, MFS earned a
Richard O. Hawkins* MFS #1 MFS #1 ranking in
Steven E. Nothern* DALBAR, Inc.'s
TREASURER DALBAR Broker/Dealer Survey,
W. Thomas London* Main Office Operations
ASSISTANT TREASURER Service Quality category. The firm achieved a 3.49
James O. Yost* overall score - on a scale of 1 to 4 - in the 1995
survey. A total of 71 firms responded, offering input
on the quality of service they receive from 36 mutual
fund companies nationwide. The survey contained
questions about service quality in 17 categories,
including "knowledge of phone service contacts,"
"accuracy of transaction processing," and "overall
ease of doing business with the firm."
----------------------------------------------------
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The past 12 months have been a good period for fixed-income markets, bringing
strong investment returns to the Fund. The Federal Reserve Board ended its
year-long string of tightening steps this past February and left interest
rates unchanged through the spring. The Fed subsequently lowered the federal
funds' target by 25 basis points (0.25%) to 5.75% on July 6, citing the
reduced threat of inflation moving higher. The fixed-income markets responded
positively to this, as well as to signs of economic slowdown and to evidence
that inflation pressures remained moderate. Two-year Treasury yields, which
were at 7.40% on November 30, 1994, declined to 5.35% by the end of November
1995, while yields on 10-year Treasuries declined from 7.90% to 5.74%. The
Fund, which is designed to provide investors with current income and
preservation of capital, was an active participant in this rally. The Fund's
net asset value, which stood at $7.96 on November 30, 1994, increased to $8.59
and $8.58 for Class A and Class B shares, respectively, on November 30, 1995,
when combined with the reinvestment of distributions, represents a total
return of 15.40% for Class A shares and 14.12% for Class B shares. During this
same period, the Lehman Brothers Intermediate Government Bond Index (an
unmanaged index comprised of issues of the U.S. Government and its agencies
with remaining maturities of less than 10 years) increased by 13.66%; the
Lehman Brothers Mortgage Index (which includes maturities of both 15 and 30
years) increased by 16.28%; and the J.P. Morgan Non-Dollar Government Bond
Index (an aggregate of actively traded government bonds of 12 countries with
remaining maturities of at least one year) advanced 19.65%.
U.S. Government Sector
Moderate, but sustainable, growth appears to be the hallmark of the economic
expansion's fifth year. While initial estimates showed the U.S. economy
growing at an annual rate of 4.2% in the third quarter, this surprisingly
strong growth was mainly driven by a pickup in consumer spending and an
increase in business and government outlays. Although impressive, this growth
rate is not expected to continue in coming months. Recent retail sales have
been disappointing, in part because of rising levels of consumer debt. Growth
is not expected to get much help from the manufacturing sector, either, as
order flows from manufacturers have moderated. Export activity, meanwhile, is
also expected to remain modest as continued weakness abroad has limited demand
for many U.S. goods. However, the Fed's consistent and, so far, successful
efforts to fight inflation seem to be giving consumers and businesses enough
longer term confidence to help maintain modest growth in real (adjusted for
inflation) gross domestic product into 1996. Long-term interest rates,
meanwhile, have moved noticeably downward in recent months in anticipation of
more modest fourth-quarter growth with continued low inflation.
The Fund's strong performance over the last 12 months was primarily a
result of its being properly positioned for a drop in U.S. interest rates. We
maintained approximately two-thirds of the portfolio's assets in the U.S.
sector and positioned these in order to benefit from opportunities for capital
appreciation as the U.S. market rallied. The average duration of the U.S.
investments is 4.2 years, approximately equivalent to that of a five-year
Treasury. The Fund has maintained a substantial position in government-
sponsored and agency securities, as we were able to add attractive incremental
yield to the portfolio in this sector. The Fund's exposure to the mortgage
sector, however, was reduced, as assets were reallocated to intermediate-
maturity Treasuries, which outperformed during this period.
The Fund's holdings of mortgage-backed pass-through securities consist
mostly of 30-year issues. These securities have a price sensitivity equivalent
to that of five-year Treasuries, with yield spreads which are 1.20% to 1.60%
greater than those of comparable Treasuries (although principal value and
interest on Treasury securities are guaranteed by the U.S. Government if held
to maturity). The mortgage market has been an attractive segment recently,
given the wide yield spreads, low levels of issuance, and good call
protection, and we will likely increase exposure to this sector in the next
few months. Our ability to invest in both Treasuries and mortgage-backed
securities within a range of maturities has proven helpful in this rapidly
changing environment.
International Sector
As we anticipated, the dollar did recover somewhat during the last six months.
The Fund's foreign currency exposure was fully hedged ahead of the dollar
advance in order to protect the value of the Fund's foreign assets. Following
this strong rise, the hedges were reduced so the Fund could benefit from the
subsequent weaker trend of the dollar, because we believe the dollar cannot
begin a long-term rally until the United States becomes less reliant on
foreign capital to finance its investments. For next year, we expect that the
dollar's overall trend will remain downward, although slow U.S. growth, if it
continues, could lead to a cyclical improvement in our borrowing of foreign
capital, taking some of the pressure off the dollar.
The majority of our foreign-based holdings remains in Europe. The core
markets, such as Germany and the Netherlands, continue to provide solid
returns against a backdrop of slow growth, low inflation and declining
official interest rates and remain an important anchor to our foreign
holdings. Other European markets, such as Denmark, offer a combination of
higher yields with moderate growth and low inflation. The highest yielding
markets have recovered over the last six months, and the Fund has increased
both its bond and currency weightings in these markets. We believe the first
part of next year should be supportive of fixed-income investments. Moderate
to slow growth, with commensurate declines in overall inflation rates, could
lead to further reductions in official interest rates.
In addition to these economic developments, European governments are
engaged in multi-year programs to reduce their budget deficits and debt
levels. These programs are positive for bonds in that lower government
spending tends to reduce inflationary pressures, and lower issuance of
government debt reduces the supply pressures on the bond market.
In the Japanese market, powerful deflationary forces have supported a drop
in yields to historically low levels. We now feel this process may be drawing
to an end, given a reversal of priorities at the central bank from fighting
inflation, which is now non-existent, to offsetting the downward spiral of
deflation. Thus, the weighting in Japan, never too large because of the low
yields, will most likely be reduced in the coming year.
The high returns of the U.S. market have been echoed in other U.S. dollar-
bloc markets. Australia, New Zealand and Canada have all contributed to
performance over the last 12 months. The Australian market currently offers
significantly higher yields than the U.S. market and, we believe, represents
good value.
As always, we will continue to maintain our commitment to providing
competitive and consistent returns over the long term. We appreciate your
support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Richard O. Hawkins /s/ Steven E. Nothern
A. Keith Brodkin Richard O. Hawkins Steven E. Nothern
Chairman and President Portfolio Manager Portfolio Manager
December 13, 1995
<PAGE>
OBJECTIVE AND POLICIES
The Fund's investment objective is to preserve capital and provide high
current income.
The Fund seeks to achieve its objective by investing in securities that are
issued or guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities and in obligations issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies or instrumentalities. 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. This
strategy should allow the Fund to preserve capital while seeking high current
income.
PORTFOLIO MANAGER PROFILES
Richard Hawkins joined MFS in 1988 as an Assistant Vice President -
Investments. A graduate of Brown University and the University of
Pennsylvania's Wharton Graduate School of Business Administration, he was
named Vice President - Investments in 1991 and Senior Vice President in 1993.
As of January 1, 1996, Mr. Hawkins will become director of the International
Fixed Income Department of MFS. Mr. Hawkins has been a Portfolio Manager of
MFS Intermediate Income Fund since 1992.
Steven Nothern began his career at MFS in 1986 in the Fixed Income Department.
A graduate of Middlebury College and Boston University's Graduate School of
Management, he was named Assistant Vice President in 1987, Vice President in
1989 and Senior Vice President in 1993. Mr. Nothern has been a Portfolio
Manager of MFS Intermediate Income Fund since 1992.
TAX FORM SUMMARY
In January 1996, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
PERFORMANCE
The information on the following page illustrates the historical performance
of MFS Intermediate Income Fund Class B shares in comparison to various market
indicators. Fund results in the graph do not reflect the deduction of any
contingent deferred sales charge (CDSC) since the CDSC is not applicable after
a six-year period. Benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Please note that effective September 7, 1993, Class A shares were offered.
Information on Class A share performance appears on the next page.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from August 1, 1988 to November 30, 1995)
Line graph representing the growth of a $10,000 investment for the eight-year
period ended November 30, 1995. The graph is scaled from $5,000 to $30,000 in
$5,000 segments. The years are marked in 12-month segments from 1988 to 1995.
There are five lines drawn to scale. One is a solid line representing MFS
Intermediate Income Fund (Class B), a second line of one long and one very-short
dash represents the J.P. Morgan Non-Dollar Government Bond Index, a third line
of short dashes represents the Lehman Brothers Intermediate Mortgage Index, a
fourth line of very-short dashes represents the Lehman Brothers Intermediate
Government Bond Index, and a fifth line of Medium-short dashes represents the
Consumer Price Index.
MFS Intermediate Income Fund (Class B) $15,977
J.P. Morgan Non-Dollar Government Bond Index $21,020
Lehman Brothers Mortgage Index $19,728
Lehman Brothers Intermediate Government Bond Index $18,587
Consumer Price Index $12,984
AVERAGE ANNUAL TOTAL RETURNS
Life of
Class
through
1 Year 3 Years 5 Years 11/30/95
- ------------------------------------------------------------------------------
MFS Intermediate Income Fund
(Class A) including 4.75% sales
charge + 9.88% -- -- + 2.03%*
- ------------------------------------------------------------------------------
MFS Intermediate Income Fund
(Class A) at net asset value +15.40% -- -- + 4.26%*
- ------------------------------------------------------------------------------
MFS Intermediate Income Fund
(Class B) with CDSC+ +10.12% + 4.57% + 5.80% + 6.60%++
- ------------------------------------------------------------------------------
MFS Intermediate Income Fund
(Class B) without CDSC +14.12% + 5.45% + 6.09% + 6.60%++
- ------------------------------------------------------------------------------
J.P. Morgan Non-Dollar
Government Bond Index(1) +19.65% +12.94% +11.26% +10.66%**
- ------------------------------------------------------------------------------
Lehman Brothers Intermediate
Government Bond Index(2) +13.66% + 6.85% + 8.30% + 8.82%**
- ------------------------------------------------------------------------------
Lehman Brothers Mortgage Index(2) +16.28% + 7.10% + 8.82% + 9.71%**
- ------------------------------------------------------------------------------
Consumer Price Index(S)(2) + 2.61% + 2.65% + 2.80% + 3.62%**
- ------------------------------------------------------------------------------
* For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1995.
+ These returns reflect the applicable Class B CDSC of 4%, 3% and 2% for the
1-, 3- and 5- year periods, respectively, and 0% for the period commencing
August 1, 1988.
++ For the period from the commencement of offering of Class B shares, August
1, 1988 to November 30, 1995.
** Benchmark comparisons begin on August 1, 1988.
(S) The Consumer Price Index is a popular measure of change in prices.
(1) Source: Asset Investment Management (AIM) software.
(2) Source: Lipper Analytical Services, Inc.
All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in a
mutual fund will vary with changes in market conditions, and shares, when
redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1995
Bonds - 96.8%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Dollar Denominated - 60.4%
U.S. Federal Agencies - 13.5%
Farm Credit Systems Financial Assistance,
9.375s, 2003 $ 10,000 $ 12,062,500
Federal Home Loan Mortgage Corp., 8.61s,
2004 10,000 10,548,400
Federal Home Loan Mortgage Corp., 9.5s,
2025 5,801 6,149,055
Federal National Mortgage Assn., 8.71s,
2005 4,000 4,223,750
Federal National Mortgage Assn., 6.5s,
2008 75 74,783
Federal National Mortgage Assn., 9.5s,
2025 172 182,659
------------
$ 33,241,147
- -----------------------------------------------------------------------------
U.S. Government Guaranteed - 46.9%
Government National Mortgage Association - 17.6%
GNMA, 7.5s, 2023 - 2024 $ 15,097 $ 15,407,989
GNMA, 8.5s, 2001 - 2009 8,463 8,864,765
GNMA, 9s, 2024 - 2025 8,904 9,385,071
GNMA, 10.5s, 2020 8,412 9,371,863
------------
$ 43,029,688
- -----------------------------------------------------------------------------
U.S. Treasury Obligations - 29.3%
Stripped Principal Payments, 0s, 1999 $ 6,600 $ 5,548,686
U.S. Treasury Notes, 7.25s, 2004 24,000 26,343,840
U.S. Treasury Bonds, 13.75s, 2004 26,000 39,975,000
------------
$ 71,867,526
- -----------------------------------------------------------------------------
Total U.S. Government Guaranteed $114,897,214
- -----------------------------------------------------------------------------
Total U.S. Dollar Denominated $148,138,361
- -----------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - 36.4%
Australia - 4.9%
Commonwealth of Australia, 8.75s, 2001 AUD 6,030 $ 4,655,380
Commonwealth of Australia, 9.5s, 2003 4,600 3,684,608
Queensland Treasury Corp., 8s, 2001 5,000 3,713,499
------------
$ 12,053,487
- -----------------------------------------------------------------------------
Canada - 2.2%
Government of Canada, 8.5s, 2000 CAD 7,000 $ 5,498,124
- -----------------------------------------------------------------------------
Denmark - 5.7%
Kingdom of Denmark, 9s, 1998 DKK 19,146 $ 3,700,318
Kingdom of Denmark, 6s, 1999 15,000 2,675,118
Kingdom of Denmark, 9s, 2000 24,170 4,764,517
Kingdom of Denmark, 8s, 2001 14,864 2,820,192
------------
$ 13,960,145
- -----------------------------------------------------------------------------
France - 1.6%
Government of France, 7.75s, 2000 FRF 18,290 $ 3,883,644
- -----------------------------------------------------------------------------
Germany - 9.5%
German Unity Fund, 8.5s, 2001 DEM 1,640 $ 1,294,200
Republic of Germany, 8.5s, 2000 4,920 3,874,096
Republic of Germany, 6.5s, 2003 2,050 $ 1,463,982
Republic of Germany, 6.875s, 2005 23,000 16,671,621
------------
$ 23,303,899
- -----------------------------------------------------------------------------
Ireland - 4.2%
Republic of Ireland, 8s, 2000 IEP 6,250 $ 10,347,075
- -----------------------------------------------------------------------------
Italy - 2.5%
Republic of Italy, 8.5s, 1999 ITL 5,620,000 $ 3,322,412
Republic of Italy, 9.5s, 1999 1,615,000 966,372
Republic of Italy, 8.5s, 2004 3,205,000 1,719,629
------------
$ 6,008,413
- -----------------------------------------------------------------------------
Netherlands - 2.2%
Dutch State Loan, 6.25s, 1998 NLG 1,210 $ 781,525
Government of Netherlands, 6.75s, 2005 6,980 4,495,798
------------
$ 5,277,323
- -----------------------------------------------------------------------------
New Zealand - 1.8%
Government of New Zealand, 9s, 1996 NZD 6,600 $ 4,348,232
- -----------------------------------------------------------------------------
Spain - 1.8%
Government of Spain, 8s, 2004 ESP 620,000 $ 4,429,218
- -----------------------------------------------------------------------------
Total Foreign - Non-U.S. Dollar Denominated $ 89,109,560
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $231,543,174) $237,247,921
- -----------------------------------------------------------------------------
Call Options Purchased
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
Japanese Bonds
March/107.489 JPY 246,000 $ 36,162
December/112.062 155,000 23,560
- -----------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid,
$50,955) $ 59,722
- -----------------------------------------------------------------------------
Put Options Purchased
- -----------------------------------------------------------------------------
Australian Dollars
January/0.745 AUD 2,655 $ 36,251
Deutsche Marks/British Pounds
January/2.25 DEM 8,100 35,932
- -----------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid,
$81,537) $ 72,183
- -----------------------------------------------------------------------------
Repurchase Agreement - 0.6%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Prudential Securities, dated 11/30/95, due
12/01/95, total to be received $1,426,231
(secured by $910,000 U.S. Treasury Notes,
11.25s, due 2/15/15, market value
$1,426,000), at Cost $ 1,426 $ 1,426,000
- -----------------------------------------------------------------------------
Total Investments (Identified Cost,
$233,101,666) $238,805,826
- -----------------------------------------------------------------------------
Call Options Written
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
Australian Dollars
February/0.7625 AUD 1,739 $ (11,061)
Deutsche Marks/British Pounds
January/2.1344 DEM 7,684 (16,743)
- -----------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $57,675) $ (27,804)
- -----------------------------------------------------------------------------
Put Options Written
- -----------------------------------------------------------------------------
Australian Dollars
January/0.745 AUD 2,655 $ (36,251)
February/0.72 1,642 (10,036)
Japanese Bonds
March/107.489 JPY 246,000 (33,457)
December/112.062 155,000 (2,326)
- -----------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $95,024) $ (82,070)
- -----------------------------------------------------------------------------
Other Assets, Less Liabilities - 2.6% $ 6,274,662
=============================================================================
Net Assets - 100.0% $244,970,614
- -----------------------------------------------------------------------------
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars FRF = French Francs
CAD = Canadian Dollars IEP = Irish Punts
CHF = Swiss Francs ITL = Italian Lire
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NLG = Dutch Guilders
ESP = Spanish Pesetas NZD = New Zealand Dollars
FIM = Finnish Markkaa SEK = Swedish Kronor
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $233,101,666) $238,805,826
Cash 197
Net receivable for forward foreign currency exchange
contracts sold 3,370,413
Net receivable for closed forward foreign currency
exchange contracts 474,109
Premium receivable on options written 21,099
Receivable for Fund shares sold 1,613
Interest receivable 4,409,390
Other assets 3,988
------------
Total assets $247,086,635
------------
Liabilities:
Payable for Fund shares reacquired $ 528,736
Written options outstanding, at value (premiums received,
$152,699) 109,874
Net payable for forward foreign currency exchange
contracts purchased 1,190,287
Payable to affiliates -
Management fee 5,031
Shareholder servicing agent fee 2,282
Distribution fee 106,026
Accrued expenses and other liabilities 173,785
------------
Total liabilities $ 2,116,021
------------
Net assets $244,970,614
============
Net assets consist of:
Paid-in capital $245,138,059
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 8,380,763
Accumulated net realized loss on investments and foreign
currency transactions (4,834,284)
Accumulated distributions in excess of net investment
income (3,713,924)
------------
Total $244,970,614
============
Shares of beneficial interest outstanding 28,535,808
============
Class A shares:
Net asset value and redemption price per share
(net assets of $12,659,098 / 1,474,074 shares of
beneficial interest outstanding) $8.59
=====
Offering price per share (100/95.25) $9.02
=====
Class B shares:
Net asset value and offering price per share
(net assets of $232,311,516 / 27,061,734 shares of
beneficial interest outstanding) $8.58
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
and Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended November 30, 1995
- ------------------------------------------------------------------------------
Net investment income:
Interest income $21,432,295
-----------
Expenses -
Management fee $ 2,071,032
Trustees' compensation 42,907
Shareholder servicing agent fee (Class A) 11,184
Shareholder servicing agent fee (Class B) 572,549
Distribution and service fee (Class B) 2,602,496
Custodian fee 202,474
Auditing fees 75,175
Postage 70,292
Printing 27,919
Legal fees 3,344
Miscellaneous 216,070
-----------
Total expenses $ 5,895,442
Fees paid indirectly (48,739)
-----------
Net expenses $ 5,846,703
-----------
Net investment income $15,585,592
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 5,339,879
Written option transactions 1,494,653
Foreign currency transactions (5,736,335)
-----------
Net realized gain on investments and foreign currency
transactions $ 1,098,197
-----------
Change in unrealized appreciation -
Investments $15,551,561
Written options 131,311
Translation of assets and liabilities in foreign currencies 3,274,010
-----------
Net unrealized gain on investments $18,956,882
-----------
Net realized and unrealized gain on investments and
foreign currency $20,055,079
-----------
Increase in net assets from operations $35,640,671
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended November 30, 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 15,585,592 $ 20,998,514
Net realized gain (loss) on investments and foreign
currency transactions 1,098,197 (38,048,815)
Net unrealized gain (loss) on investments and foreign
currency translation 18,956,882 (3,803,215)
------------ -------------
Increase (decrease) in net assets from operations $ 35,640,671 $ (20,853,516)
------------ -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (465,663) $ --
From net investment income (Class B) (15,003,559) --
Tax return of capital -- (23,336,946)
------------ -------------
Total distributions declared to shareholders $(15,469,222) $ (23,336,946)
------------ -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 19,596,804 $ 23,051,653
Net asset value of shares issued to shareholders in
reinvestment of distributions 7,773,413 10,845,091
Cost of shares reacquired (98,621,737) (160,869,455)
------------ -------------
Decrease in net assets from Fund share transactions $(71,251,520) $(126,972,711)
------------ -------------
Total decrease in net assets $(51,080,071) $(171,163,173)
Net assets:
At beginning of period 296,050,685 467,213,858
------------ -------------
At end of period (including accumulated distributions
in excess of net investment income of $3,713,924 and
$1,286,788, respectively) $244,970,614 $ 296,050,685
============ =============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
<CAPTION>
- ---------------------------------------------------------------------------------------------
Year Ended November 30, 1995 1994 1993<F1> 1995 1994 1993
- ---------------------------------------------------------------------------------------------
Class A Class B
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 7.96 $ 8.94 $ 9.11 $ 7.96 $ 8.93 $ 8.88
------ ------ ------ ------ ------ ------
Income from investment
operations<F4> -
Net investment income $ 0.57 $ 0.59 $ 0.11 $ 0.48 $ 0.47 $ 0.47
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 0.61 (0.95) (0.17) 0.61 (0.92) 0.26
------ ------ ------ ------ ------ ------
Total from investment
operations $ 1.18 $(0.36) $(0.06) $ 1.09 $(0.45) $ 0.73
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.55) $ -- $(0.09) $(0.47) -- $(0.45)
From net realized gain on
investments and foreign
currency transactions -- -- (0.02) -- -- (0.16)
Tax return of capital -- (0.62) -- -- (0.52) (0.07)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.55) $(0.62) $(0.11) $(0.47) $(0.52) $(0.68)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 8.59 $ 7.96 $ 8.94 $ 8.58 $ 7.96 $ 8.93
====== ====== ====== ====== ====== ======
Total return<F6> 15.40% (4.27)% (0.66)%<F3> 14.12% (5.24)% 8.42%
Ratios (to average net assets)/Supplemental data:
Expenses<F5> 1.14% 1.18% 1.22%<F2> 2.23% 2.22% 2.15%
Net investment income 6.81% 7.10% 6.43%<F2> 5.79% 5.60% 5.19%
Portfolio turnover 275% 211% 376% 275% 211% 376%
Net assets at end of period
(000 omitted) $12,659 $3,432 $ 258 $232,312 $292,619 $466,955
<FN>
<F1> For the period from the commencement of offering of Class A shares,
September 7, 1993 to November 30, 1993.
<F2> Annualized.
<F3> Not annualized.
<F4> Per share data for the periods subsequent to November 30, 1992 is based on
average shares outstanding.
<F5> For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
<F6> 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.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended November 30, 1992 1991 1990 1989 1988<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 $ 9.31 $ 9.23 $ 9.50 $ 9.77 $ 9.47
-------- -------- -------- -------- --------
Income from investment operations -
Net investment income $ 0.62 $ 0.58 $ 0.59 $ 0.68 $ 0.35
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions (0.26) 0.32 (0.02) (0.08) 0.10
-------- -------- -------- -------- --------
Total from investment
operations $ 0.36 $ 0.90 $ 0.57 $ 0.60 $ 0.45
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.57) $ (0.56) $ (0.45) $ (0.85) $ (0.12)
From net realized gain on
investments and foreign
currency transactions (0.15) (0.14) -- (0.02) (0.03)
From paid-in capital (0.07) (0.12) (0.39) -- --
-------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (0.79) $ (0.82) $ (0.84) $ (0.87) $ (0.15)
-------- -------- -------- -------- --------
Net asset value - end of period $ 8.88 $ 9.31 $ 9.23 $ 9.50 $ 9.77
======== ======== ======== ======== ========
Total return 3.93% 10.30% 6.59% 6.60% 14.21%<F2>
Ratios (to average net assets)/Supplemental data:
Expenses 2.20% 2.24% 2.33% 2.47% 2.79%<F2>
Net investment income 6.70% 6.65% 6.80% 7.13% 17.14%<F2>
Portfolio turnover 372% 603% 579% 433% 120%
Net assets at end of period (000
omitted) $347,588 $196,753 $126,245 $ 75,039 $ 30,858
<FN>
<F1> For the period from the commencement of investment operations, August 1,
1988 to November 30, 1988.
<F2> Annualized.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Intermediate Income 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 - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues and forward
contracts, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices. Short-
term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency
and translated into U.S. dollars at the closing daily exchange rate. Options
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, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Written Options - The Fund may 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. In general, written
call options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options
may also be used as a part of an income producing strategy reflecting the view
of the Fund's management on the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded for financial statement purposes as unrealized until
the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the ex-
interest date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net 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 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, 1995, $2,543,506 was
reclassified from accumulated undistributed net realized loss on investments
and foreign currency transactions to accumulated distributions in excess of
net investment income, due to differences between book and tax accounting for
mortgage-backed securities and currency transactions. This change had no
effect on the net assets or net asset value per share.
At November 30, 1995, the Fund, for federal income tax purposes, had a
capital loss carryforward of $5,760,666, which may be applied against any net
taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on November 30, 2002.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A
and Class B shares. The two classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the common expenses of the Fund pro rata based on the average daily net
assets of each class, without distinction between share classes. Dividends
are declared separately for each class. No class has preferential dividend
rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.32%
of average daily net assets and 5.65% of investment income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all of its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $8,032 for the year ended November 30, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$1,929 for the year ended November 30, 1995, as its portion of the sales
charge on sales of Class A shares of the Fund. The Trustees have adopted
separate distribution plans for Class A and Class B shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service
fee to each securities dealer that enters into a sales agreement with MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares which are attributable to that securities dealer, a
distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares, commissions to dealers and payments
to MFD wholesalers for sales at or above a certain dollar level, and other
such distribution-related expenses that are approved by the Fund. Payments
will commence under the distribution plan when the value of the net assets of
the Fund attributable to Class A shares first equals or exceeds $40 million.
The Class B distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B shares.
MFD will pay to securities dealers that enter into a sales agreement with MFD
all or a portion of the service fee attributable to Class B shares. The
service fee is intended to be additional consideration for services rendered
by the dealer with respect to Class B shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $62,367
for Class B shares for the year ended November 30, 1995. Fees incurred under
the distribution plan during the year ended November 30, 1995 were 1.00% of
average daily net assets attributable to Class B shares on an annualized
basis.
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
shareholder 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 shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended November 30, 1995 were
$1,884 and $874,514 for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22%, attributable to Class A
and Class B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. Government securities $439,454,221 $464,599,546
============ ============
Investments (non-U.S. Government securities) $279,039,432 $298,083,045
============ ============
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 $233,101,666
============
Gross unrealized appreciation $ 6,560,376
Gross unrealized depreciation (856,216)
------------
Net unrealized appreciation $ 5,704,160
============
(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
1995 1994
---------------------------- -----------------------------
Year Ended
November 30, Shares Amount Shares Amount
- ----------------- ------------------------------------------------------------
Shares sold 1,267,467 $ 10,593,433 431,707 $ 3,593,208
Shares issued
to shareholders
in reinvestment
of distributions 37,313 309,025 12,470 101,627
Shares reacquired (261,755) (2,164,838) (42,026) (348,132)
--------- ------------ ------- -----------
Net increase 1,043,025 $ 8,737,620 402,151 $ 3,346,703
========= ============ ======= ===========
Class B Shares
1995 1994
---------------------------- -----------------------------
Year Ended
November 30, Shares Amount Shares Amount
- ----------------- ------------------------------------------------------------
Shares sold 1,088,366 $ 9,003,371 2,258,937 $ 19,458,445
Shares issued
to shareholders
in reinvestment
of distributions 909,234 7,464,388 1,275,308 10,743,464
Shares reacquired (11,699,599) (96,456,899) (19,037,730) (160,521,323)
----------- ------------ ----------- -------------
Net decrease (9,701,999) $(79,989,140) (15,503,485) $(130,319,414)
=========== ============ =========== =============
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended November
30, 1995 was $2,297.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
<PAGE>
<TABLE>
Written Option Transactions
<CAPTION>
1995 Calls 1995 Puts
------------------------------ ------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
Australian Dollars 4,763 $ 33,341 -- $ --
Canadian Dollars -- -- 3,838 20,023
Deutsche Marks -- -- 19,600 109,306
Japanese Yen/Deutsche Marks -- -- 1,544,027 185,941
Swiss Francs/Deutsche Marks 6,207 26,135 -- --
Options written -
Australian Dollars 14,012 131,295 14,510 160,404
British Pounds 4,522 78,032 4,219 78,032
Canadian Dollars 6,218 13,041 13,125 51,744
Deutsche Marks 114,179 812,008 51,931 354,994
DeutscheMarks/British Pounds 14,974 93,952 -- --
Finnish Markkaa/Deutsche Marks -- -- 14,440 10,562
Italian Lire/Deutsche -- -- 11,569,773 125,455
Japanese Yen -- -- 4,044,360 268,206
Spanish Pesetas/ Deutsche Marks -- -- 413,969 27,129
Options terminated in closing
transactions -
Australian Dollars (17,036) (153,572) (10,213) (116,334)
British Pounds (4,522) (78,032) -- --
Canadian Dollars (6,218) (13,041) (16,963) (71,767)
Deutsche Marks (54,046) (369,417) (41,081) (275,512)
DeutscheMarks/British Pounds (7,290) (47,341) -- --
Italian Lire/Deutsche Marks -- -- (2,808,653) (21,015)
Japanese Yen -- -- (3,643,360) (217,252)
Japanese Yen/Deutsche Marks -- -- (1,544,027) (185,941)
Spanish Pesetas/Deutsche Marks -- -- (413,969) (27,129)
Options exercised -
Italian Lire/Deutsche Marks -- -- (6,121,995) (83,245)
Swiss Francs/Deutsche Marks (6,207) (26,135) -- --
Options expired -
British Pounds -- -- (4,219) (78,032)
Deutsche Marks (60,133) (442,591) (30,450) (188,788)
Finnish Markkaa/Deutsche Marks -- -- (14,440) (10,562)
Italian
Lire/Deutsche Marks -- -- (2,639,125) (21,195)
------ -------- --------- --------
OUTSTANDING, END OF PERIOD 9,423 $ 57,675 405,297 $ 95,024
====== ======== ======= ========
OPTIONS OUTSTANDING AT END OF PERIOD
CONSIST OF -
Australian Dollars 1,739 $ 11,064 4,297 $ 44,070
Deutsche Marks/British Pounds 7,684 46,611 -- --
Japanese Yen -- -- 401,000 50,954
------ -------- --------- --------
OUTSTANDING, END OF PERIOD 9,423 $ 57,675 405,297 $ 95,024
====== ======== ======= ========
</TABLE>
At November 30, 1995, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<PAGE>
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive at Value In Exchange for Depreciation)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales 12/01/95 - 12/07/95 AUD 5,510,577 $ 4,092,154 $ 4,102,803 $ 10,649
1/30/96 - 2/26/96 CAD 9,400,466 6,918,534 6,937,367 18,833
12/15/95 - 5/31/96 CHF 8,131,089 7,001,894 7,187,017 185,123
12/07/95 - 5/31/96 DEM 125,172,912 86,697,295 88,397,992 1,700,697
12/07/95 DKK 85,602,951 15,286,633 15,581,738 295,105
12/07/95 ESP 706,404,867 5,727,531 5,564,653 (162,878)
12/15/95 FIM 7,999,500 1,861,796 1,818,481 (43,315)
12/18/95 - 4/12/96 FRF 41,658,056 8,348,950 8,439,019 90,069
1/08/96 IEP 6,463,885 10,248,606 10,263,873 15,267
12/07/95 - 12/21/95 ITL 26,969,366,513 16,854,738 16,721,464 (133,274)
12/07/95 - 6/07/96 JPY 2,500,073,008 24,853,226 25,980,644 1,127,418
12/14/95 - 1/22/96 NLG 16,342,981 10,117,034 10,418,350 301,316
12/20/95 NZD 3,871,000 2,522,131 2,531,297 9,166
12/14/95 SEK 49,901,245 7,605,499 7,561,736 (43,763)
------------ ------------ -----------
$208,136,021 $211,506,434 $ 3,370,413
============ ============ ===========
Purchases 12/01/95 AUD 2,249,630 $ 1,670,800 $ 1,683,308 $ (12,508)
2/26/96 CAD 3,422,959 2,518,435 2,529,529 (11,094)
12/14/95 CHF 5,745,740 4,897,933 5,020,832 (122,899)
12/07/95 - 5/31/96 DEM 95,090,903 65,841,102 66,969,628 (1,128,526)
2/29/96 DKK 30,525,305 5,459,909 5,617,627 (157,718)
12/14/95 FIM 7,812,201 1,818,134 1,820,203 (2,069)
12/27/95 - 5/31/96 FRF 42,570,960 8,528,096 8,680,510 (152,414)
12/07/95 - 1/31/96 ITL 23,731,334,075 14,821,758 14,636,149 185,609
12/07/95 - 3/27/96 JPY 2,505,465,325 24,754,968 24,897,772 (142,804)
12/14/95 NLG 8,379,839 5,180,735 5,320,533 (139,798)
12/20/95 NZD 1,785,685 1,163,454 1,171,052 (7,598)
12/15/95 SEK 77,723,155 11,844,931 11,357,040 487,891
------------ ------------ -----------
$149,552,433 $150,742,720 $(1,190,287)
============ ============ ===========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net receivable of $474,109 at November 30, 1995.
At November 30, 1995, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust II and Shareholders of MFS Intermediate
Income Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Intermediate Income Fund (one
of the series constituting MFS Series Trust II) as of November 30, 1995, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended November 30, 1995 and 1994, and the
financial highlights for each of the years in the eight-year period ended
November 30, 1995. 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, 1995 by correspondence with the custodian. An
audit also includes assessing the accounting, principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Intermediate
Income Fund at November 30, 1995, 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 5, 1996
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
IT'S EASY TO CONTACT US
MFS AUTOMATED INFORMATION
ACCOUNT INFORMATION:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
MARKET OUTLOOK:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
MFS PERSONAL SERVICE
ACCOUNT SERVICE:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
PRODUCT INFORMATION:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
IRA SERVICE:
Call 1-800-637-1255 any business day
from 8 a.m. to 6 p.m. Eastern time.
SERVICE FOR THE HEARING-IMPAIRED:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
MFS MAILING ADDRESSES
FOR PERSONAL ACCOUNTS:
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
FOR IRA ACCOUNTS:
MFS Service Center, Inc.
J.W. McCormack Station
P.O. Box 4501
Boston, MA 02101-9817
<PAGE>
MFS(R) [LOGO: -------------
INTERMEDIATE DALBAR BULK RATE
INCOME FUND MFS #1 MFS U.S. POSTAGE
DALBAR] PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S (R)
THE FIRST NAME IN MUTUAL FUNDS]
MII-2 1/96/19M 5/205
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements Included in Part A:
For the period from the commencement of investment
operations (December 29, 1986 for MFS Emerging
Growth Fund and MFS Capital Growth Fund and August
1, 1988 for MFS Intermediate Income Fund and MFS
Gold & Natural Resources Fund) to November 30, 1995
Financial Highlights
Financial Statements Included in Part B:
At November 30, 1995
Portfolio of Investments*
Statement of Assets and Liabilities*
For each of the two years ended November 30, 1994
and November 30, 1995,
Statement of Changes in Net Assets
For the year ended November 30, 1995
Statement of Operations*
- ------------------------------
* Incorporated herein by reference to the Funds' Annual Report to
Shareholders dated November 30, 1995 filed with the SEC on February 5,
1996.
(b) Exhibits
1 (a) Amended and Restated Declaration of Trust,
dated February 3, 1995. (3)
(b) Amendment to Declaration of Trust, dated
February 21, 1996;
filed herewith.
2 Amended and Restated By-Laws, dated December
14, 1994. (3)
3 Not Applicable.
4 (a) Form of Share Certificate (for certificates
produced prior to DST system). (6)
(b) Form of Share Certificate for Class A and
Class B Shares. (4)
5 (a) Investment Advisory Agreement for MFS
Emerging Growth Fund, dated August 1, 1993
as amended through August 9, 1995; filed
herewith.
(b) Investment Advisory Agreement for MFS
Capital Growth Fund, dated September 1,
1993. (3)
(c) Investment Advisory Agreement for MFS
Intermediate Income Fund, dated September 1,
1993. (3)
(d) Investment Advisory Agreement for MFS Gold &
Natural Resources Fund, dated September 1,
1993. (3)
6 (a) Distribution Agreement between the Trust and
MFS Fund Distributors, Inc., dated January
1, 1995. (3)
(b) Dealer Agreement between MFS Fund
Distributors, Inc. ("MFD"), and a dealer,
dated December 28, 1994 and the Mutual Fund
Agreement between MFD and a bank or NASD
affiliate, dated December 28, 1994. (1)
7 Retirement Plan for Non-Interested Person
Trustees, dated January 1, 1991. (6)
8 (a) Custodian Agreement, dated January 28, 1988.
(6)
(b) Amendment to Custodian Agreement, dated
February 29, 1988. (6)
(c) Amendment to Custodian Agreement, dated
October 1, 1989. (6)
(d) Amendment to the Custodian Agreement, dated
October 9, 1991. (6)
9 (a) Shareholder Servicing Agent Agreement, dated
September 10, 1986. (6)
(b) Amendment to Shareholder Servicing Agent
Agreement, dated September 7, 1993. (6)
(c) Form of Amendment, dated February 14, 1996
to Shareholder Servicing Agent Agreement,
dated September 7, 1993; filed herewith.
(d) Exchange Privilege Agreement, dated February
8, 1989, as amended through and including
September 1, 1995. (7)
(e) Loan Agreement by and among the Banks named
therein, the MFS Funds named therein, and
The First National Bank of Boston, dated as
of February 21, 1995. (2)
(f) Dividend Disbursing Agent Agreement, dated
February 1, 1986. (4)
10 Consent and Opinion of Counsel for the
fiscal year ended November 30, 1995, filed
with the Rule 24f-2 Notice on January 25,
1996.
11 Consent of Deloitte & Touche LLP; filed
herewith.
12 Not Applicable.
13 Investment Representation Letter. (6)
14 (a) Forms for Individual Retirement Account
Disclosure Statement as currently in
effect. (5)
(b) Forms for MFS 403(b) Custodial Account
Agreement as currently in effect. (5)
(c) Forms for MFS Prototype Paired Defined
Contribution Plans as Trust Agreement as
currently in effect. (5)
15 (a) Distribution Plan for Class A shares of MFS
Emerging Growth Fund, dated December 14,
1994. (3)
(b) Distribution Plan for Class B shares of MFS
Emerging Growth Fund, dated December 14,
1994. (3)
(c) Form of Distribution Plan for Class C shares
of MFS Emerging Growth Fund, dated February
14, 1996; filed herewith.
(d) Distribution Plan for Class A shares of MFS
Capital Growth Fund, dated December 14,
1994. (3)
(e) Distribution Plan for Class B shares of MFS
Capital Growth Fund, dated December 14,
1994. (3)
(f) Distribution Plan for Class A shares of MFS
Intermediate Income Fund, dated December 14,
1994. (3)
(g) Distribution Plan for Class B shares of MFS
Intermediate Income Fund, dated December 14,
1994. (3)
(h) Distribution Plan for Class A shares of MFS
Gold & Natural Resources Fund, dated
December 14, 1994. (3)
(i) Distribution Plan for Class B shares of MFS
Gold & Natural Resources Fund, dated
December 14, 1994. (3)
16 Schedule for Computation of Performance
Quotations - Average Annual Total Rate of
Return, Aggregate Total Rate of Return and
Standardized Yield. (1)
17 Financial Data Schedules for each class of
each series. (3)
18 Not Applicable.
Power of Attorney, dated August 11, 1994.(3)
- -----------------------------
(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via EDGAR
on February 22, 1995.
(2) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal
Income Trust (File No. 811-4841) filed with the SEC via EDGAR on February
28, 1995.
(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 16
filed with the SEC via EDGAR on March 30, 1995. (4) Incorporated by
reference to MFS Municipal Series Trust (File Nos. 2-92915 and 811-4096)
Post-Effective Amendment No. 28 filed with the SEC via EDGAR on July 28,
1995.
(5) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR on
August 28, 1995.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 17
filed with the SEC via EDGAR on October 13, 1995.
(7) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and
811-4492) Post-Effective Amendment No. 13 filed with the SEC via EDGAR on
November 28, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
For MFS Emerging Growth Fund
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Record Holders
<S> <C>
Class A Shares of Beneficial Interest 122,858
(without par value) (as of February 29, 1996)
Class B Shares of Beneficial Interest 165,698
(without par value) (as of February 29, 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of February 29, 1996)
</TABLE>
For MFS Capital Growth Fund
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Record Holders
<S> <C>
Class A Shares of Beneficial Interest 10,648
(without par value) (as of February 29, 1996)
Class B Shares of Beneficial Interest 33,571
(without par value) (as of February 29, 1996)
</TABLE>
For MFS Intermediate Income Fund
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Record Holders
<S> <C>
Class A Shares of Beneficial Interest 930
(without par value) (as of February 29, 1996)
Class B Shares of Beneficial Interest 11,298
(without par value) (as of February 29, 1996)
</TABLE>
For MFS Gold & Natural Resources Fund
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Record Holders
<S> <C>
Class A Shares of Beneficial Interest 1,108
(without par value) (as of February 29, 1996)
Class B Shares of Beneficial Interest 3,167
(without par value) (as of February 29, 1996)
</TABLE>
Item 27. Indemnification
The Trustees and officers of the Trust and the personnel of
the Trust's investment adviser and principal underwriter are insured under an
errors and omissions liability insurance policy. The Trust and its officers are
also insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940, as amended.
Reference is hereby made to (a) Article V of the Trust's
Declaration of Trust, incorporated by reference to Post-Effective Amendment No.
16, filed with the SEC on March 30, 1995 and (b) Section 8 of the Shareholder
Servicing Agent Agreement, incorporated by reference to Registrant's
Post-Effective Amendment No. 17 filed with the SEC via EDGAR on October 13,
1995.
Item 28. Business and Other Connections of Investment Adviser
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds: Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS
Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has eight series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund and MFS
Special Opportunities Fund), MFS Series Trust II (which has four series: MFS
Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and
MFS Gold & Natural Resources Fund), MFS Series Trust III (which has two series:
MFS High Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV
(which has four series: MFS Money Market Fund, MFS Government Money Market Fund,
MFS Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two
series: MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which
has three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has four series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign
& Colonial International Growth Fund and MFS/Foreign & Colonial International
Growth and Income Fund), and MFS Municipal Series Trust (which has 19 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Louisiana Municipal Bond Fund, MFS Maryland Municipal
Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond
Fund, MFS New York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund,
MFS Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund,
MFS Tennessee Municipal Bond Fund, MFS Texas Municipal Bond Fund, MFS Virginia
Municipal Bond Fund, MFS Washington Municipal Bond Fund, MFS West Virginia
Municipal Bond Fund and MFS Municipal Income Fund) (the "MFS Funds"). The
principal business address of each of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following
no-load, open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven
series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS
Union Standard Trust ("UST") (which has two series). The principal business
address of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL"), Sun Growth Variable Annuity Funds, Inc. ("SGVAF"),
Money Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, World Governments
Variable Account, Total Return Variable Account and Managed Sectors Variable
Account. The principal business address of each is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of the Republic of Ireland and a subsidiary of MFS,
whose principal business address is 41-45 St. Stephen's Green, Dublin 2,
Ireland, serves as investment adviser to and distributor for MFS International
Fund (which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International Funds-Global
Governments Fund and MFS International Funds-Charter Income Fund) (the "MIL
Funds"). The MIL Funds are organized in Luxembourg and qualify as an undertaking
for collective investments in transferable securities (UCITS). The principal
business address of the MIL Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund and MFS Meridian Research Fund
(collectively the "MFS Meridian Funds"). Each of the MFS Meridian Funds is
organized as an exempt company under the laws of the Cayman Islands. The
principal business address of each of the MFS Meridian Funds is P.O. Box 309,
Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with respect
to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and annuity
contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary
of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT, MVI and UST.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary
of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, Bruce C. Avery, William S. Harris, William W. Scott,
Jr., and Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Joseph W.
Dello Russo is a Senior Vice President, Chief Financial Officer and Treasurer,
Robert T. Burns is a Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Assistant
Treasurer.
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Series Trust I
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust X
MFS Government Limited Maturity Fund
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Vice
President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS Series Trust II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice
President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer, and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS Series Trust III
A. Keith Brodkin is the Chairman and President, James T.
Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS, are
Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost is the Assistant Treasurer, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS Series Trust IV
MFS Series Trust IX
A. Keith Brodkin is the Chairman and President, Robert A.
Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS Series Trust VII
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS Series Trust VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Municipal Series Trust
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel
E. McManus, Assistant Vice President of MFS, is an Assistant Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS Variable Insurance Trust
MFS Union Standard Trust
MFS Institutional Trust
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Municipal Income Trust
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS Multimarket Income Trust
MFS Charter Income Trust
A. Keith Brodkin is the Chairman and President, Patricia A.
Zlotin, Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS Special Value Trust
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Patricia A. Zlotin and Robert J. Manning are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, and James O. Yost, is
the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott and Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of
MFS, is the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS,
is a Senior Vice President, Stephen E. Cavan is a Director, Senior Vice
President and the Clerk, James R. Bordewick, Jr. is a Director, Vice President
and an Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello
Russo is the Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E.
Cavan is a Director and the Secretary, Ziad Malek is the President, James E.
Russell is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL Funds
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle and Richard W. S. Baker are Directors,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary, and Ziad Malek is a Senior Vice President.
MFS Meridian Funds
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott and
Jeffrey L. Shames are Directors, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James R. Bordewick, Jr., is the Assistant Secretary,
James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior Vice
President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive
Vice President of MFS, is the President, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the
Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C.
Avery is the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the
President and a Director, Leslie J. Nanberg is a Senior Vice President, a
Managing Director and a Director, George F. Bennett, Carol A. Corley, John A.
Gee, Brianne Grady and Kevin R. Parke are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr., Joseph A. Recomendes and Bruce C. Avery
are Directors, Arnold D. Scott is the Chairman and a Director, Douglas C. Grip,
a Senior Vice President of MFS, is the President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli
is a Senior Vice President.
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company
of Canada (U.S.), One Sun Life
Executive Park, Wellesley Hills,
Massachusetts
Director, Sun Life Insurance and
Annuity Company of New York, 67
Broad Street, New York, New York
John R. Gardner President and a Director, Sun Life
Assurance Company of Canada, Sun
Life Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr.
Gardner is also an officer and/or
Director of various subsidiaries
and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company
of Canada, Sun Life Centre, 150
King Street West, Toronto,
Ontario, Canada (Mr. McNeil is
also an officer and/or Director of
various subsidiaries and
affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations,
The Boston Company, Exchange
Place, Boston, Massachusetts
(until August, 1994)
Item 29. Distributors
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
Item 30. Location of Accounts and Records
The accounts and records of the Registrant are located, in
whole or in part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to shareholders
upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being Registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 28th day of March, 1996.
MFS SERIES TRUST II
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on March 28, 1996.
SIGNATURE TITLE
A. KEITH BRODKIN* Chairman, President (Principal
- ------------------------------------- Executive Officer) and Trustee
A. Keith Brodkin
W. THOMAS LONDON* Treasurer (Principal Financial Officer
- ------------------------------------- and Principal Accounting Officer)
W. Thomas London
RICHARD B. BAILEY* Trustee
- -------------------------------------
Richard B. Bailey
MARSHALL N. COHAN* Trustee
- -------------------------------------
Marshall N. Cohan
LAWRENCE H. COHN, M.D.* Trustee
- -------------------------------------
Lawrence H. Cohn, M.D.
SIR J. DAVID GIBBONS* Trustee
- -------------------------------------
Sir J. David Gibbons
ABBY M. O'NEILL* Trustee
- -------------------------------------
Abby M. O'Neill
WALTER E. ROBB, III* Trustee
- -------------------------------------
Walter E. Robb, III
ARNOLD D. SCOTT* Trustee
- -------------------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- -------------------------------------
Jeffrey L. Shames
J. DALE SHERRATT* Trustee
- -------------------------------------
J. Dale Sherratt
WARD SMITH* Trustee
- -------------------------------------
Ward Smith
*By: JAMES R. BORDEWICK, JR.
------------------------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to a
Power of Attorney dated August 11,
1994, incorporated by reference to the
Registrant's Post-Effective Amendment
No. 16 filed with the Securities and
Exchange Commission on March 30, 1995.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
1 (b) Amendment to the Declaration of Trust, dated
February 21, 1996.
5 (a) Investment Advisory Agreement for MFS Emerging Growth
Fund, dated August 1, 1993 as amended through August 9,
1995.
9 (c) Form of Amendment, dated February 14, 1996
to Shareholder Servicing Agent Agreement, dated
September 7, 1993.
11 Consent of Deloitte & Touche LLP.
15 (c) Form of Distribution Plan for Class C shares
of MFS Emerging Growth Fund, dated February 14,
1996.
</TABLE>
<PAGE>
EXHIBIT 99.1(b)
MFS SERIES TRUST II
CERTIFICATION OF AMENDMENT
TO THE DECLARATION OF TRUST
ESTABLISHMENT AND DESIGNATION
OF CLASSES
The undersigned, being a majority of the Trustees of MFS Series Trust
II (the "Trust"), a business trust organized under the laws of The Commonwealth
of Massachusetts pursuant to an Amended and Restated Declaration of Trust dated
February 2, 1995, as amended (the "Declaration"), acting pursuant to Section
6.10 of the Declaration, do hereby divide the shares of MFS Emerging Growth
Fund, a series of MFS Series Trust II, to create an additional class of shares,
within the meaning of Section 6.10, as follows:
1. The additional class of shares is designated "Class C Shares";
2. Class C Shares shall be entitled to all the rights and preferences
accorded to shares under the Declaration;
3. The purchase price of Class C Shares, the method of determination
of the net asset value Class C Shares, the price, terms and manner
of redemption of Class C Shares, and the relative dividend rights
of holders of Class C Shares shall be established by the Trustees
of the Trust in accordance with the Declaration and shall be set
forth in the current prospectus and statement of additional
information of the Trust or any series thereof, as amended from
time to time, contained in the Trust's registration statement
under the Securities Act of 1933, as amended;
4. Class C Shares shall vote together as a single class except that
Shares of a class may vote separately on matters affecting only
that class and Shares of a class not affected by a matter will not
vote on that matter; and
5. A class of Shares of any series of the Trust may be terminated by
the Trustees by written notice to the Shareholders of the class.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed
this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 14th day of February 1996.
/s/ A. KEITH BRODKIN /s/ WALTER E. ROBB III
- ------------------------------------- ---------------------------------------
A. Keith Brodkin Walter E. Robb, III
76 Farm Road 35 Farm Road
Sherborn, MA 01770 Sherborn, MA 01770
/s/ RICHARD B. BAILEY /s/ ARNOLD D. SCOTT
- ------------------------------------- ---------------------------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
/s/ MARSHALL N. COHAN /s/ JEFFREY L. SHAMES
- ------------------------------------- ---------------------------------------
Marshall N. Cohan Jeffrey L. Shames
2524 Bedford Mews Drive 60 Brookside Road
Wellington, FL 33414 Needham, MA 02192
/s/ LAWRENCE H. COHN /s/ J. DALE SHERRATT
- ------------------------------------- ---------------------------------------
Lawrence H. Cohn J. Dale Sherratt
45 Singletree Road 86 Farm Road
Chestnut Hill, MA 02167 Sherborn, MA 01770
<PAGE>
/s/ SIR J. DAVID GIBBONS /s/ WARD SMITH
- ------------------------------------- ---------------------------------------
Sir J. David Gibbons Ward Smith
"Leeward" 36080 Shaker Blvd
5 Leeside Drive Hunting Valley, OH 44022
"Point Shares"
Pembroke, Bermuda HM 05
/s/ ABBY M. O'NEIL
- -------------------------------------
Abby M. O'Neill
200 Sunset Road
Oyster Bay, NY 11771
<PAGE>
EXHIBIT 99.5(a)
AMENDMENT TO INVESTMENT
ADVISORY AGREEMENT
AMENDMENT dated as of August 9, 1995 to the Investment Advisory Agreement dated
August 1, 1993 by and between MFS Series Trust II (the "Trust") on behalf of MFS
Emerging Growth Fund (formerly, MFS Lifetime Emerging Growth Fund) (the "Fund"),
a series of the Trust, and Massachusetts Financial Services Company, a Delaware
corporation (the "Adviser") (the "Agreement").
WITNESSETH
WHEREAS, the Trust on behalf of the Fund has entered into the Agreement with the
Adviser; and
WHEREAS, MFS has agreed to amend the Agreement as provided below;
NOW THEREFORE, in consideration of the mutual covenants and agreements of the
parties hereto as herein set forth, the parties covenant and agree as follows:
1. Amendment of the Agreement: Effective as of July 1, 1995, the first
sentence of Article 3 of the Agreement is deleted and replaced in its entirety
as follows:
"For the services to be rendered and the facilities provided,
the Fund shall pay to the Adviser an investment advisory fee
computed and paid monthly in an amount equal to the sum of
0.75% of the first $2.5 billion of the Fund's average daily
net assets and 0.70% of the amount in excess of $2.5 billion,
in each case on an annualized basis for the Fund's
then-current fiscal year."
2. Miscellaneous: Except as set forth in this Amendment, the Agreement
shall remain in full force and effect, without amendment or modification.
3. Prior Amendments: This Amendment supercedes any and all previous
amendments to the Agreement.
4. Limitation of Liability of the Trustees and Shareholders: A copy of
the Trust's Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts. The parties hereto acknowledge that the
obligations of or arising out of this instrument are not binding upon any of the
Trust's trustees, officers, employees, agents or shareholders individually, but
are binding solely upon the assets and property of the Trust in accordance with
its proportionate interest hereunder. If this instrument is executed by the
Trust on behalf of one or more series of the Trust, the parties hereto
acknowledge that the assets and liabilities of each series of the Trust are
separate and distinct and that the obligations of or arising out of this
instrument are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this instrument. If the Trust has executed this
instrument on behalf of more than one series of the Trust, the parties hereto
also agree that the obligations of each series hereunder shall be several and
not joint, in accordance with its proportionate interest hereunder, and the
parties hereto agree not to proceed against any series for the obligations of
another series.
IN WITNESS WHEREOF, the parties have caused this Amendment to the Agreement to
be executed and delivered in the names and on their behalf by the undersigned,
therewith duly authorized, all as of the day and year first above written.
MFS SERIES TRUST II,
on behalf of MFS EMERGING GROWTH FUND
By: /s/ A. KEITH BRODKIN
-------------------------------
A. Keith Brodkin, Chairman
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By: /s/ ARNOLD D. SCOTT
-------------------------------
Arnold D. Scott, Senior
Executive Vice President
<PAGE>
EXHIBIT 99.9(c)
FORM OF AMENDMENT TO SHAREHOLDER
SERVICING AGENT AGREEMENT
MFS SERIES TRUST II
500 Boylston Street x Boston x Massachusetts 02116
February 14, 1996
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder Servicing
Agent Agreement between us, dated September 10, 1986, as modified by a letter
agreement dated December 31, 1992, and amended September 7, 1993, is hereby
amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS SERIES TRUST II on behalf of
MFS EMERGING GROWTH FUND
By: /s/ W. THOMAS LONDON
------------------------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: /s/ JAMES E. RUSSELL
------------------------------
James E. Russell
Treasurer
<PAGE>
ATTACHMENT 1
[Date]
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS EMERGING GROWTH FUND (the "Fund")
1. The fees to be paid by the Fund on behalf of its series with respect to Class
A shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class;
0.12% of the second $500 million of the assets of the series attributable
to such class;
0.09% over $1 billion of the assets of the series attributable to such
class.
2. The fees to be paid by the Fund on behalf of its series with respect to Class
B shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.22% of the first $500 million of the assets of the series attributable
to such class;
0.18% of the second $500 million of the assets of the series attributable
to such class;
0.13% over $1 billion of the assets of the series attributable to such
class.
3. The fees to be paid by the Fund on behalf of its series with respect to Class
C shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class;
0.12% of the second $500 million of the assets of the series attributable
to such class;
0.09% over $1 billion of the assets of the series attributable to such
class.
<PAGE>
EXHIBIT NO. 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 18 to Registration Statement No.33-7637 of MFS Series Trust II of
our reports each dated January 5, 1996 appearing in the annual reports to
shareholders for the year ended November 30, 1995, of MFS Emerging Growth Fund,
MFS Gold & Natural Resources Fund and MFS Intermediate Income Fund, and our
report dated January 6, 1996 appearing in the annual report to shareholders for
the year ended November 30, 1995 of MFS Capital Growth Fund, each a series of
MFS Series Trust II and to the references to us under the headings "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information, both of which are part
of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 25, 1996
<PAGE>
EXHIBIT 99.15(c)
MFS SERIES TRUST II
MFS EMERGING GROWTH FUND
FORM PLAN OF DISTRIBUTION
PLAN OF DISTRIBUTION with respect to the shares of beneficial interest to be
designated "Class C" of MFS Emerging Growth Fund (the "Fund"), a series of MFS
Series Trust II, a Massachusetts business trust, dated February 14, 1996.
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940,
as amended (collectively with the rules and regulations promulgated thereunder,
the "1940 Act"); and
WHEREAS, the Trust intends to distribute the shares of beneficial interest
(without par value) of the Fund designated Class C Shares (the "Shares") in
accordance with Rule 12b-1 under the 1940 Act ("Rule 12b-1"), and desires to
adopt this Distribution Plan (the "Plan") as a plan of distribution pursuant to
such Rule; and
WHEREAS, the Trust desires for MFS Fund Distributors, Inc., a Delaware
corporation, to provide certain distribution services for the Fund (the
"Distributor"); and
WHEREAS, the Trust has entered into a distribution agreement (the
"Distribution Agreement") (in a form approved by the Board of Trustees of the
Trust in a manner specified in Rule 12b-1) with the Distributor, whereby the
Distributor will provide facilities and personnel and render services to the
Fund in connection with the offering and distribution of the Shares (the
"Distribution Agreement"); and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor may
retain the services of firms or individuals to act as dealers (the "Dealers") of
the Shares in connection with the offering of Shares, and (b) the Distributor
may make payments for such services to the Dealers out of the fee paid to the
Distributor hereunder, any deferred sales charges imposed by the Distributor in
connection with the repurchase of Shares, its profits or any other source
available to it; and
WHEREAS, the Trust recognizes and agrees that the Distributor may (but is
not required to) impose certain deferred sales charges in connection with the
repurchase of Shares by the Fund, and the Distributor may retain (or receive
from the Fund as the case may be) all such deferred sales charges; and
WHEREAS, the Board of Trustees of the Trust, in considering whether the
Fund should adopt and implement this Plan, has evaluated such information as it
deemed necessary to an informed determination as to whether this Plan should be
adopted and implemented and has considered such pertinent factors as it deemed
necessary to form the basis for a decision to use assets of the Fund for such
purposes, and has determined that there is a reasonable likelihood that the
adoption and implementation of this Plan will benefit the Fund and its Class C
shareholders;
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts this Plan
for the Fund as a plan for distribution relating to the Shares in accordance
with Rule 12b-1, on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall
provide facilities, personnel and a program with respect to the offering and
sale of Shares. Among other things, the Distributor shall be responsible for any
commissions payable to Dealers (including any ongoing maintenance commissions),
all expenses of printing (excluding typesetting) and distributing prospectuses
to prospective shareholders and providing such other related services as are
reasonably necessary in connection therewith.
2. The Distributor shall bear all distribution-related expenses to the
extent specified in the Distribution Agreement in providing the services
described in paragraph 1, including without limitation, the compensation of
personnel necessary to provide such services and all costs of travel, office
expenses (including rent and overhead), equipment, printing, delivery and
mailing costs.
3. It is understood that the Distributor may (but is not required to)
impose certain deferred sales charges in connection with the repurchase of
Shares by the Fund and the Distributor may retain (or receive from the Fund, as
the case may be) all such deferred sales charges. As additional consideration
for all services performed and expenses incurred in the performance of its
obligations under the Distribution Agreement, the Fund shall pay the Distributor
a distribution fee periodically at a rate not to exceed 0.75% per annum of the
Fund's average daily net assets attributable to the Shares.
4. As partial consideration for the personal services and/or account
maintenance services performed by each Dealer in the performance of its
obligations under its dealer agreement with the Distributor, the Fund shall pay
each Dealer a service fee periodically at a rate not to exceed 0.25% per annum
of the portion of the average daily net assets of the Fund that is represented
by Shares that are owned by investors for whom such Dealer is the holder or
dealer of record. That portion of the Fund's average daily net assets on which
the fees payable under this paragraph 4 hereof are calculated may be subject to
certain minimum amount requirements as may be determined, and additional or
different dealer qualification standards that may be established, from time to
time by the Distributor. The Distributor shall be entitled to be paid any fees
payable under this paragraph 4 hereof with respect to Shares for which no Dealer
of record exists or qualification standards have not been met as partial
consideration for personal services and/or account maintenance services provided
by the Distributor to the Shares. The service fee payable pursuant to this
paragraph 4 may from time to time be paid by the Fund to the Distributor and the
Distributor will then pay these fees to Dealers on behalf of the Fund or retain
them in accordance with this paragraph.
5. The Fund understands that agreements between the Distributor and the
Dealers may provide for payment of commissions to Dealers in connection with the
sales of Shares and may provide for a portion (which may be all or substantially
all) of the fees payable by the Fund to the Distributor under the Distribution
Agreement to be paid by the Distributor to the Dealers in consideration of the
Dealer's services as a dealer of the Shares. Except as described in paragraph 4,
nothing in this Plan shall be construed as requiring the Fund to make any
payment to any Dealer or to have any obligations to any Dealer in connection
with services as a dealer of the Shares. The Distributor shall agree and
undertake that any agreement entered into between the Distributor and any Dealer
shall provide that, except as provided in paragraph 4, such Dealer shall look
solely to the Distributor for compensation for its services thereunder and that
in no event shall such Dealer seek any payment from the Fund.
6. The Fund shall pay all fees and expenses of any independent auditor,
legal counsel, investment adviser, administrator, transfer agent, custodian,
shareholder servicing agent, registrar or dividend disbursing agent of the Fund;
expenses of distributing and redeeming Shares and servicing shareholder
accounts; expenses of preparing, printing and mailing prospectuses, shareholder
reports, notices, proxy statements and reports to governmental officers and
commissions and to shareholders of the Fund, except that the Distributor shall
be responsible for the distribution-related expenses as provided in paragraphs 1
and 2 hereof.
7. Nothing herein contained shall be deemed to require the Trust to take
any action contrary to its Declaration of Trust or By-Laws or any applicable
statutory or regulatory requirement to which it is subject or by which it is
bound, or to relieve or deprive the Board of Trustees of the responsibility for
and control of the conduct of the affairs of the Fund.
8. This Plan shall become effective upon (a) approval by a vote of at
least a "majority of the outstanding voting securities" of Class C, and (b)
approval by a vote of the Board of Trustees and a vote of a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan (the "Qualified Trustees"), such votes to be cast in person
at a meeting called for the purpose of voting on this Plan.
9. This Plan shall continue in effect indefinitely; provided that such
continuance is "specifically approved at least annually" by a vote of both a
majority of the Trustees of the Trust and a majority of the Qualified Trustees.
If such annual approval is not obtained, this Plan shall expire 12 months after
the effective date of the last approval.
10. This Plan may be amended at any time by the Board of Trustees;
provided that this Plan may not be amended to increase materially the amount of
permitted expenses hereunder without the approval of holders of a "majority of
the outstanding voting securities" of Class C and may not be materially amended
in any case without a vote of a majority of both the Trustees and the Qualified
Trustees. This Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or by a vote of the holders of a "majority of the outstanding
voting securities" of Class C.
11. The Fund and the Distributor shall provide the Board of Trustees, and
the Board of Trustees shall review, at least quarterly, a written report of the
amounts expended under this Plan and the purposes for which such expenditures
were made.
12. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Trust.
13. For the purposes of this Plan, the terms "interested persons",
"majority of the outstanding voting securities" and "specifically approved at
least annually" are used as defined in the 1940 Act. In addition, for purposes
of determining the fees payable to the Distributor hereunder, the value of the
Fund's net assets shall be computed in the manner specified in the Fund's
then-current prospectus and statement of additional information for computation
of the net asset value of the Shares of the Fund.
14. The Trust shall preserve copies of this Plan, and each agreement
related hereto and each report referred to in paragraph 11 hereof (collectively,
the "Records") for a period of six years from the end of the fiscal year in
which such Record was made and each such record shall be kept in an easily
accessible place for the first two years of said record-keeping.
15. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
16. If any provision of this Plan shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS SERIES TRUST II-MFS EMERGING GROWTH FUND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000798250
<NAME> MFS SERIES TRUST II
<SERIES>
<NUMBER> 011
<NAME> MFS EMERGING GROWTH FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 2185584151
<INVESTMENTS-AT-VALUE> 3366195765
<RECEIVABLES> 22204191
<ASSETS-OTHER> 38780
<OTHER-ITEMS-ASSETS> 146892
<TOTAL-ASSETS> 3388585628
<PAYABLE-FOR-SECURITIES> 59491278
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16574352
<TOTAL-LIABILITIES> 76065630
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2132225191
<SHARES-COMMON-STOCK> 48960009
<SHARES-COMMON-PRIOR> 25089804
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 62577
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 254230
<ACCUM-APPREC-OR-DEPREC> 1180611614
<NET-ASSETS> 3312519998
<DIVIDEND-INCOME> 1591294
<INTEREST-INCOME> 3663824
<OTHER-INCOME> 0
<EXPENSES-NET> 37619619
<NET-INVESTMENT-INCOME> (32364501)
<REALIZED-GAINS-CURRENT> 9896203
<APPREC-INCREASE-CURRENT> 847013830
<NET-CHANGE-FROM-OPS> 824545532
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 9533382
<DISTRIBUTIONS-OTHER> 544859
<NUMBER-OF-SHARES-SOLD> 67800740
<NUMBER-OF-SHARES-REDEEMED> 44418694
<SHARES-REINVESTED> 488159
<NET-CHANGE-IN-ASSETS> 2074056845
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 19221140
<OVERDISTRIB-NII-PRIOR> 43710
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15957197
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 38522740
<AVERAGE-NET-ASSETS> 2127769807
<PER-SHARE-NAV-BEGIN> 18.73
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 8.68
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.38
<RETURNS-OF-CAPITAL> 0.01
<PER-SHARE-NAV-END> 26.79
<EXPENSE-RATIO> 1.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS SERIES TRUST II-MFS EMERGING GROWTH FUND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000798250
<NAME> MFS SERIES TRUST II
<SERIES>
<NUMBER> 012
<NAME> MFS EMERGING GROWTH FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 2185584151
<INVESTMENTS-AT-VALUE> 3366195765
<RECEIVABLES> 22204191
<ASSETS-OTHER> 38780
<OTHER-ITEMS-ASSETS> 146892
<TOTAL-ASSETS> 3388585628
<PAYABLE-FOR-SECURITIES> 59491278
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16574352
<TOTAL-LIABILITIES> 76065630
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2132225191
<SHARES-COMMON-STOCK> 75349572
<SHARES-COMMON-PRIOR> 41390197
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 62577
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 254230
<ACCUM-APPREC-OR-DEPREC> 1180611614
<NET-ASSETS> 3312519998
<DIVIDEND-INCOME> 1591294
<INTEREST-INCOME> 3663824
<OTHER-INCOME> 0
<EXPENSES-NET> 37619619
<NET-INVESTMENT-INCOME> (32364501)
<REALIZED-GAINS-CURRENT> 9896203
<APPREC-INCREASE-CURRENT> 847013830
<NET-CHANGE-FROM-OPS> 824545532
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 10006703
<DISTRIBUTIONS-OTHER> 544859
<NUMBER-OF-SHARES-SOLD> 67040946
<NUMBER-OF-SHARES-REDEEMED> 33540206
<SHARES-REINVESTED> 458635
<NET-CHANGE-IN-ASSETS> 2074056845
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 19221140
<OVERDISTRIB-NII-PRIOR> 43710
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15957197
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 38522740
<AVERAGE-NET-ASSETS> 2127769807
<PER-SHARE-NAV-BEGIN> 18.57
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 8.65
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.24
<RETURNS-OF-CAPITAL> 0.01
<PER-SHARE-NAV-END> 26.56
<EXPENSE-RATIO> 2.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS SERIES TRUST II-MFS CAPITAL GROWTH FUND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000798250
<NAME> MFS SERIES TRUST II
<SERIES>
<NUMBER> 021
<NAME> MFS CAPITAL GROWTH FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 412311120
<INVESTMENTS-AT-VALUE> 515540456
<RECEIVABLES> 4829822
<ASSETS-OTHER> 13005
<OTHER-ITEMS-ASSETS> 3657
<TOTAL-ASSETS> 520386940
<PAYABLE-FOR-SECURITIES> 2559976
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1263805
<TOTAL-LIABILITIES> 3823781
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 338446198
<SHARES-COMMON-STOCK> 4987749
<SHARES-COMMON-PRIOR> 193365
<ACCUMULATED-NII-CURRENT> 300226
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 74588788
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 103227947
<NET-ASSETS> 516563159
<DIVIDEND-INCOME> 8938158
<INTEREST-INCOME> 890614
<OTHER-INCOME> 0
<EXPENSES-NET> 9288150
<NET-INVESTMENT-INCOME> 540622
<REALIZED-GAINS-CURRENT> 74848998
<APPREC-INCREASE-CURRENT> 70041904
<NET-CHANGE-FROM-OPS> 145431524
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 43087
<DISTRIBUTIONS-OF-GAINS> 120843
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5253774
<NUMBER-OF-SHARES-REDEEMED> 471616
<SHARES-REINVESTED> 12226
<NET-CHANGE-IN-ASSETS> (129451071)
<ACCUMULATED-NII-PRIOR> 1339652
<ACCUMULATED-GAINS-PRIOR> 17864814
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3363454
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9346819
<AVERAGE-NET-ASSETS> 448460595
<PER-SHARE-NAV-BEGIN> 13.49
<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> 4.91
<PER-SHARE-DIVIDEND> 0.22
<PER-SHARE-DISTRIBUTIONS> 0.62
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.67
<EXPENSE-RATIO> 1.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS SERIES TRUST II-MFS CAPITAL GROWTH FUND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000798250
<NAME> MFS SERIES TRUST II
<SERIES>
<NUMBER> 022
<NAME> MFS CAPITAL GROWTH FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 412311120
<INVESTMENTS-AT-VALUE> 515540456
<RECEIVABLES> 4829822
<ASSETS-OTHER> 13005
<OTHER-ITEMS-ASSETS> 3657
<TOTAL-ASSETS> 520386940
<PAYABLE-FOR-SECURITIES> 2559976
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1263805
<TOTAL-LIABILITIES> 3823781
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 338446198
<SHARES-COMMON-STOCK> 24393716
<SHARES-COMMON-PRIOR> 28765078
<ACCUMULATED-NII-CURRENT> 300226
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 74588788
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 103227947
<NET-ASSETS> 516563159
<DIVIDEND-INCOME> 8938158
<INTEREST-INCOME> 890614
<OTHER-INCOME> 0
<EXPENSES-NET> 9288150
<NET-INVESTMENT-INCOME> 540622
<REALIZED-GAINS-CURRENT> 74848998
<APPREC-INCREASE-CURRENT> 70041904
<NET-CHANGE-FROM-OPS> 145431524
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1541960
<DISTRIBUTIONS-OF-GAINS> 17999182
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5400613
<NUMBER-OF-SHARES-REDEEMED> 11169472
<SHARES-REINVESTED> 1397497
<NET-CHANGE-IN-ASSETS> (129451071)
<ACCUMULATED-NII-PRIOR> 1339652
<ACCUMULATED-GAINS-PRIOR> 17864814
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3363454
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9346819
<AVERAGE-NET-ASSETS> 448460595
<PER-SHARE-NAV-BEGIN> 13.37
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 4.85
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0.62
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 17.56
<EXPENSE-RATIO> 2.14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS SERIES TRUST II-MFS GOLD AND NATURAL RESOURCES FUND
AND IS QUALIFIED INITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000798250
<NAME> MFS SERIES TRUST II
<SERIES>
<NUMBER> 041
<NAME> MFS GOLD AND NATURAL RESOURCES FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 28486611
<INVESTMENTS-AT-VALUE> 26764161
<RECEIVABLES> 1053764
<ASSETS-OTHER> 475
<OTHER-ITEMS-ASSETS> 1591
<TOTAL-ASSETS> 27819991
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 284545
<TOTAL-LIABILITIES> 284545
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32067047
<SHARES-COMMON-STOCK> 1131379
<SHARES-COMMON-PRIOR> 642132
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 29466
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 2779679
<ACCUM-APPREC-OR-DEPREC> (1722456)
<NET-ASSETS> 27535446
<DIVIDEND-INCOME> 446170
<INTEREST-INCOME> 82455
<OTHER-INCOME> 0
<EXPENSES-NET> 724906
<NET-INVESTMENT-INCOME> (196281)
<REALIZED-GAINS-CURRENT> 1624411
<APPREC-INCREASE-CURRENT> 417929
<NET-CHANGE-FROM-OPS> (1402763)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5439951
<NUMBER-OF-SHARES-REDEEMED> 4950704
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4881453
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 22892
<OVERDIST-NET-GAINS-PRIOR> 1156418
<GROSS-ADVISORY-FEES> 234960
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 789679
<AVERAGE-NET-ASSETS> 31328125
<PER-SHARE-NAV-BEGIN> 5.76
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.18
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 5.59
<EXPENSE-RATIO> 1.43
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS SERIES TRUST II-MFS GOLD AND NATURAL RESOURCES FUND
AND IS QUALIFIED INITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000798250
<NAME> MFS SERIES TRUST II
<SERIES>
<NUMBER> 042
<NAME> MFS GOLD AND NATURAL RESOURCES FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 28486611
<INVESTMENTS-AT-VALUE> 26764161
<RECEIVABLES> 1053764
<ASSETS-OTHER> 475
<OTHER-ITEMS-ASSETS> 1591
<TOTAL-ASSETS> 27819991
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 284545
<TOTAL-LIABILITIES> 284545
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32067047
<SHARES-COMMON-STOCK> 3886354
<SHARES-COMMON-PRIOR> 5059216
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 29466
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 2779679
<ACCUM-APPREC-OR-DEPREC> (1722456)
<NET-ASSETS> 27535446
<DIVIDEND-INCOME> 446170
<INTEREST-INCOME> 82455
<OTHER-INCOME> 0
<EXPENSES-NET> 724906
<NET-INVESTMENT-INCOME> (196281)
<REALIZED-GAINS-CURRENT> 1624411
<APPREC-INCREASE-CURRENT> 417929
<NET-CHANGE-FROM-OPS> (1402763)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7007971
<NUMBER-OF-SHARES-REDEEMED> 8180833
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4881453
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 22892
<OVERDIST-NET-GAINS-PRIOR> 1156418
<GROSS-ADVISORY-FEES> 234960
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 789679
<AVERAGE-NET-ASSETS> 31328125
<PER-SHARE-NAV-BEGIN> 5.68
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 0.18
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 5.46
<EXPENSE-RATIO> 2.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS SERIES TRUST II-MFS INTERMEDIATE INCOME FUND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000798250
<NAME> MFS SERIES TRUST II
<SERIES>
<NUMBER> 031
<NAME> MFS INTERMEDIATE INCOME FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 233101666
<INVESTMENTS-AT-VALUE> 238805826
<RECEIVABLES> 8276624
<ASSETS-OTHER> 3988
<OTHER-ITEMS-ASSETS> 197
<TOTAL-ASSETS> 247086635
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2116021
<TOTAL-LIABILITIES> 2116021
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 245138059
<SHARES-COMMON-STOCK> 1474074
<SHARES-COMMON-PRIOR> 431049
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 3713924
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 4834284
<ACCUM-APPREC-OR-DEPREC> 8380763
<NET-ASSETS> 244970614
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 21432295
<OTHER-INCOME> 0
<EXPENSES-NET> 5846703
<NET-INVESTMENT-INCOME> 15585592
<REALIZED-GAINS-CURRENT> 1098197
<APPREC-INCREASE-CURRENT> 18956882
<NET-CHANGE-FROM-OPS> 35640671
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 465663
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1267467
<NUMBER-OF-SHARES-REDEEMED> 261755
<SHARES-REINVESTED> 37313
<NET-CHANGE-IN-ASSETS> 51080071
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 1286788
<OVERDIST-NET-GAINS-PRIOR> 8475987
<GROSS-ADVISORY-FEES> 2071032
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5895442
<AVERAGE-NET-ASSETS> 267705382
<PER-SHARE-NAV-BEGIN> 7.96
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 0.61
<PER-SHARE-DIVIDEND> 0.55
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.59
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS SERIES TRUST II-MFS INTERMEDIATE INCOME FUND AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000798250
<NAME> MFS SERIES TRUST II
<SERIES>
<NUMBER> 032
<NAME> MFS INTERMEDIATE INCOME FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 233101666
<INVESTMENTS-AT-VALUE> 238805826
<RECEIVABLES> 8276624
<ASSETS-OTHER> 3988
<OTHER-ITEMS-ASSETS> 197
<TOTAL-ASSETS> 247086635
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2116021
<TOTAL-LIABILITIES> 2116021
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 245138059
<SHARES-COMMON-STOCK> 27061734
<SHARES-COMMON-PRIOR> 36763733
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 3713924
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 4834284
<ACCUM-APPREC-OR-DEPREC> 8380763
<NET-ASSETS> 244970614
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 21432295
<OTHER-INCOME> 0
<EXPENSES-NET> 5846703
<NET-INVESTMENT-INCOME> 15585592
<REALIZED-GAINS-CURRENT> 1098197
<APPREC-INCREASE-CURRENT> 18956882
<NET-CHANGE-FROM-OPS> 35640671
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 465663
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1088366
<NUMBER-OF-SHARES-REDEEMED> 11699599
<SHARES-REINVESTED> 909234
<NET-CHANGE-IN-ASSETS> 51080071
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 1286788
<OVERDIST-NET-GAINS-PRIOR> 8475987
<GROSS-ADVISORY-FEES> 2071032
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5895442
<AVERAGE-NET-ASSETS> 267705382
<PER-SHARE-NAV-BEGIN> 7.96
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0.61
<PER-SHARE-DIVIDEND> 0.47
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.58
<EXPENSE-RATIO> 2.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
