As filed with the Securities and Exchange Commission on April 16, 1998
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. 26
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 28
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)
|_| on March 30, 1998 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date]pursuant to paragraph (a)(i)
|X| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
<PAGE>
MFS SERIES TRUST II
MFS CHARTER 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>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a), (b) * *
(c) Information Concerning Shares *
of the Fund - Performance
Information
(d) * *
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
(b) Front Cover Page; Management *
of the Fund - Investment Adviser;
Back Cover Page
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C> <C> <C>
(c) Management of the Fund - *
Investment Adviser
(d) Management of the Fund - *
Investment Adviser;
Administrator - Back Cover Page
(e) Management of the Fund - *
Shareholder Servicing Agent; Back
Cover Page
(f) Expense Summary; Condensed *
Financial Information; Information
Concerning Shares of the Fund
(g) Investment Objective and Policies; *
Information Concerning Shares
of the Fund - Purchases
(h) * *
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C> <C> <C>
(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 Plan;
Information Concerning Shares
of the Fund - Purchases; Expense
Summary
(f) Information Concerning Shares *
of the Fund - Distribution Plan
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C> <C> <C>
(g) Expense Summary; Information *
Concerning Shares of the Fund -
Purchases; Information
Concerning Shares of the Fund -
Exchanges; Information
Concerning Shares of the Fund -
Redemptions and Repurchases;
Information Concerning Shares
of the Fund - Distribution Plan;
Information Concerning Shares
of the Fund -Distributions;
Information Concerning Shares
of the Fund -Performance
Information; Shareholder Services
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 * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C> <C> <C>
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;
Trustee Compensation Table
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;
Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares Distribution Plan
of the Fund - Distribution Plan
(g) * *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C> <C> <C>
(h) * Management of the Fund -
Custodian; Independent
Auditors; Back Cover Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a), (c), (d) * Portfolio Transactions and
Brokerage Commissions
(b), (e) * *
18 (a) Information Concerning Shares Description of Shares, Voting
of the Fund - Description of Rights and Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Fund - Purchases;
Shareholder Services
(b) Information Concerning Shares Determination of Net Asset
of the Fund - Net Asset Value; Value and Performance -
Information Concerning Shares Net Asset Value
of the Fund - Purchases
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution Plan
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance;
Performance Information
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
<S> <C> <C> <C>
23 * Independent Auditors
</TABLE>
- -------------------------------
* Not Applicable
** Contained in Annual Report
<PAGE>
MFS CHARTER INCOME FUND
Supplement to the July 1, 1998 Prospectus and
Statement of Additional Information
The following information should be read in conjunction with the Fund's
Prospectus and Statement of Additional Information ("SAI"), dated July 1, 1998,
and contains a description of Class I shares.
Class I shares are available for purchase only by certain investors as
described under the caption "Eligible Purchasers" below.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses: Class I
Maximum Initial Sales Charge Imposed on Purchases of Fund -------
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
Annual Operating Expenses of the Fund (as a percentage of average net assets):
Management Fees........................................................................ ____%
Rule 12b-1 Fees........................................................................ None
Other Expenses (after expense limitation)(1)(2)........................................ ____%
-----
Total Operating Expenses (after expense limitation)(2)................................. ____%
</TABLE>
- ----------------------
(1) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
(2) The Adviser has agreed to bear the Fund's expenses, subject to
reimbursement by the Fund, such that "Other Expenses" do not exceed ___%
per annum of its average daily net assets during the current fiscal year.
Otherwise, "Other Expenses" and "Total Operating Expenses" would be ___%
and ___%, respectively. See "Other Information" below.
Example of Expenses
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
Period Class I
1 year........................................ $___
3 years....................................... ___
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
The "Example" set forth above should not be considered a representation of past
or future expenses of the Fund; actual expenses may be greater or less than
those shown.
-1-
<PAGE>
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans ,endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments or law firms acting as trustee or manager for trust
accounts which initially invest, on behalf of their trust clients, at
least $100,000 in Class I shares of the Fund (additional investments may
be made in any amount); provided that MFD may accept smaller initial
purchases if it believes, in its sole discretion, that the bank trust
department or law firm will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
-2-
<PAGE>
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
Subject to termination or revision at the sole discretion of the Adviser,
the Adviser has agreed to bear the Fund's expenses (after taking into effect any
compensating balance and offset arrangements) such that the Fund's "Other
Expenses," which are defined to include all Fund expenses except for management
fees, Rule 12b-1 fees, taxes, extraordinary expenses, brokerage and transactions
costs and class specific expenses, do not exceed ___% per annum of its average
daily net assets (the "Maximum Percentage"). The payments made by the Adviser on
behalf of the Fund under this arrangement are subject to reimbursement by the
Fund to the Adviser, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to the Adviser computed and paid monthly at a
percentage of its average daily net assets for its then current fiscal year,
with a limitation that immediately after such payment the Fund's "Other
Expenses" will not exceed the Maximum Percentage. The obligation of the Adviser
to bear the Fund's "Other Expenses" pursuant to this arrangement and the Fund's
obligation to pay the reimbursement fee to the Adviser terminates on the earlier
of the date on which payments made by the Fund equal the prior payment of such
reimbursable expenses by the Adviser or July 1, 2001.
The date of this Supplement is July 1, 1998
-3-
<PAGE>
PROSPECTUS
July 1, 1998
MFS[RegTM] CHARTER Class A Shares of Beneficial Interest
INCOME FUND Class B Shares of Beneficial Interest
(A member of the MFS Family Class C Shares of Beneficial Interest
of Funds [RegTM]
- --------------------------------------------------------------------------------
MFS CHARTER INCOME FUND 500 Boylston St., Boston, MA 02116(617) 954-5000
The investment objective of MFS Charter Income Fund (the "Fund") is to maximize
current income. No assurance can be given that the Fund's investment objective
will be achieved. See "Investment Objective and Policies." The Fund is a
non-diversified series of MFS Series Trust II (the "Trust"). The minimum
initial investment generally is $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors Inc.,
("MFD"), respectively, both of which are located at 500 Boylston Street,
Boston, Massachusetts 02116.
(continued on next page)
Investment products are not insured by the FDIC or any other government agency,
and are not deposits or other obligations of, or guaranteed by, any financial
institution. Shares of mutual funds are subject to investment risk, including
possible loss of the principal amount invested, and will fluctuate in value.
You may receive more or less than you paid when you redeem your shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Investors should read this Prospectus and retain it for future reference.
<PAGE>
(continued from previous page)
This Prospectus sets forth concisely the information concerning the Fund that a
prospective investor ought to know before investing. The Fund has filed with
the Securities and Exchange Commission (the "SEC") a Statement of Additional
Information, dated July 1, 1998, as amended or supplemented from time to time
(the "SAI"), which contains more detailed information about the Fund. The SAI
is incorporated into this Prospectus by reference. See page 45 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number). The SEC maintains an Internet World Wide
Web site (http://www.sec.gov) that contains the SAI, materials that are
incorporated by reference into this Prospectus and the SAI, and other
information regarding the Fund. This Prospectus is available on the Adviser's
Internet World Wide Web site at http://www.mfs.com.
Table of Contents
<TABLE>
<CAPTION>
Page
-----
<S> <C>
1. Expense Summary ................................................. 3
2. The Fund ........................................................ 4
3. Investment Objective and Policies ............................... 5
4. Management of the Fund .......................................... 21
5. Information Concerning Shares of the Fund ....................... 23
Purchases ..................................................... 23
Exchanges ..................................................... 30
Redemptions and Repurchases ................................... 31
Distribution Plan ............................................. 34
Distributions ................................................. 37
Tax Status .................................................... 37
Net Asset Value ............................................... 38
Description of Shares, Voting Rights and Liabilities .......... 38
Performance Information ....................................... 39
Expenses ...................................................... 40
6. Shareholder Services ............................................ 41
APPENDIX A ...................................................... A-1
APPENDIX B ...................................................... B-1
APPENDIX C ...................................................... C-1
</TABLE>
2
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
Class A Class B Class C
--------------- --------------- ---------------
<S> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a percentage
of offering price) ................................ 4.75% None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price See
or redemption proceeds, as applicable) ............ Below(1) 4.00% 1.00%
Annual Operating Expenses (as a percentage
of average daily net assets):
Management Fees ..................................... 0. % 0. % 0. %
Rule 12b-1 Fees ..................................... 0.35%(2) 1.00%(3) 1.00%(3)
Other Expenses (after expense limitation)(4)(5) ..... . % . % . %
----------- --------- ---------
Total Operating Expenses (after expense
limitation)(5) .................................... . % . % . %
</TABLE>
- ----------------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases."
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of average daily net assets attributable to the Class A
shares. Distribution expenses paid under the Plan, together with the initial
sales charge, may cause long-term shareholders to pay more than the maximum
sales charge that would have been permissible if imposed entirely as an
initial sales charge. See "Information Concerning Shares of the Fund --
Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Class B shares and Class C
shares, respectively. Distribution expenses paid under the Plan with respect
to Class B or Class C shares, together with any CDSC, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge. See "Information
Concerning Shares of the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
3
<PAGE>
(5) The Adviser has agreed to bear the Fund's expenses, subject to reimbursement
by the Fund, such that "Other Expenses" do not exceed % per annum of the
Fund's average daily net assets during the current fiscal year. Otherwise
"Other Expenses" for the Fund would be %, % and % per annum for Class A,
Class B and Class C Shares, respectively. Absent any fee reductions, "Total
Operating Expenses" for the Fund would be %, % and % for Class A, Class B
and Class C Shares, respectively. See "Information Concerning Shares of the
Fund -- Expenses" below.
Example of Expenses
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and, unless otherwise
noted, (b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
Period Class A Class B Class C
- ------------------ --------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C>
1 year ........... $ $ $ (1) $ $ (1)
3 years ..........
</TABLE>
- ----------------------
(1)Assumes no redemption.
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear
directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Management of the Fund -- Investment Adviser"; and (iv)
Rule 12b-1 (i.e., distribution plan) fees -- "Distribution Plan."
The "Example" set forth above should not be considered a representation of past
or future expenses of the Fund; actual expenses may be greater or less than
those shown.
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 sold
continuously to the public and the Fund then uses the proceeds to buy
securities (primarily foreign and domestic debt securities) for its portfolio.
Three classes of shares of the Fund currently are offered for sale to the
general public. Class A shares are offered at net asset value plus an initial
sales charge up to a maximum of 4.75% of the offering price (or a CDSC upon
redemption of 1.00% during the first year in the case of purchases of $1
million or more and certain purchases by retirement plans) and subject to an
annual distribution fee and a 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
4
<PAGE>
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 or a CDSC but are subject to a CDSC
upon redemption of 1.00% during the first year and an annual distribution fee
and service fee up to a maximum of 1.00% per annum. Class C shares do not
convert to any other class of shares of the Fund. In addition, the Fund offers
an additional class of shares, Class I shares, exclusively to certain
institutional investors. Class I shares are made available by means of a
separate Prospectus Supplement provided to institutional investors eligible to
purchase Class I shares and are offered at net asset value without an initial
sales charge or CDSC upon redemption and without an annual distribution and
service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. MFS is the Fund's investment adviser. The Adviser is responsible for
the management of the Fund's assets and the officers of the Trust are
responsible for the Fund's operations. The Adviser manages the portfolio from
day to day in accordance with the Fund's investment objective and policies. A
majority of the Trustees are not affiliated with the Adviser. The Fund also
offers to buy back (redeem) its shares from its shareholders at any time at net
asset value less any applicable CDSC.
3. INVESTMENT OBJECTIVE AND POLICIES
Investment Objective -- The Fund's investment objective is to maximize current
income, and pursues this objective by investing primarily in fixed income
securities.
Investment Policies -- The Fund seeks to achieve its objective by investing
approximately one-third of its assets in each of the following sectors of the
fixed income securities markets: (i) securities issued or guaranteed as to
prinicpal and interest by the U.S. Government, its agencies, authorities or
instrumentalities ("U.S. Government Securities") and related options; (ii) debt
securities issued by foreign governments, their political subdivisions and
other foreign issuers, including up to 10% of the Fund's assets in emerging
markets debt securities and Brady Bonds; and (iii) high yielding corporate
fixed income securities, some of which may involve equity features. By
following this investment strategy, the Fund's net asset value is likely to be
more stable than that of a fund which invests in only one of these three fixed
income sectors. The Fund's investment adviser, MFS, believes that greater
stability would occur because, in general, each sector historically has
produced results which are different from each other sector, so that
significant changes in one sector have tended to offset changes in other
sectors. During periods of unusual market or economic conditions (such as a
collapse of the high yield corporate fixed income market or a general
contraction in yields on foreign obligations), the Fund may invest up to 50% of
its assets in any one sector and may choose not to invest in a sector in order
to achieve its investment objective. The Fund expects that, under normal market
conditions, the maturity of its portfolio securities will not exceed 30 years
in the U.S. Government sector and 25 years in the corporate fixed income
sector. Securities selected within a particular sector will be those which
offer the highest income available, except where differences in yield are not
sufficient to justify investments in higher risk securities. There can be no
assurance that the Fund will achieve its investment objective. For the risk
considerations involved, see "Special Considerations."
5
<PAGE>
U.S. Government Securities: The Fund may invest in U.S. Government
Securities, which 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 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; 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 National Mortgage Association ("FNMA");
and (iii) interest in trusts or other entities representing interest in
obligations that reissued or guaranteed by the U.S Government or that are
backed by the full faith and credit of the U.S. Government. 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 instrumentalilties. For a description of
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, see Appendix B.
Some 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 corporate interest bearing securities.
Like other interest bearing securities, however, the values of U.S. Government
Securities change as interest rates fluctuate.
Foreign Securities: Foreign securities in which the Fund may invest and are
not traded on a U.S. exchange, include securities issued by foreign
governments, their political subdivisions and by foreign corporations. The
Fund may also invest in fixed income and equity securities of non-U.S. issuers
and securities of domestic issuers denominated in a foreign currency. Such
securities may include corporate debt securities, established company equity
securities, emerging growth equity securities, bank obligations and bank equity
securities (described below) in which the Fund may invest in accordance with
its investment objective. For the risk considerations involved, see "Risks of
Investment in Foreign Securities." The percentage of the Fund's assets invested
in securities issued abroad and denominated in foreign currencies will vary
depending on the relative yield of such securities, the relative appreciation
potential of such securities, the state of the economies of the countries in
which the investments are made and such countries' financial markets, and the
relationship of such countries' currencies to the U.S. dollar. Currency is
judged 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. To the extent the Fund
invests in foreign securities, under normal conditions the Fund's portfolio of
foreign securities will include those of a number of foreign countries. The
Fund may hold foreign currency for hedging purposes to protect against declines
in the U.S. dollar value of foreign securities held by the Fund and against
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increases in the U.S. dollar value of the foreign securities which the Fund
might purchase. The Fund may also hold foreign currency in anticipation of
purchasing foreign securities. The Fund will not invest 25% or more of the
value of its assets in the securities of any one foreign government. See "Risk
Factors -- Risks of Investment in Foreign Securities".
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 "Risk Factors -- Risks of Investment in 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, Croatia, Dominican Republic, Ecuador, Jordan, Mexico,
Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds
or floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
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Corporate Debt Securities: Corporate debt securities of both domestic and
foreign issuers in which the Fund may invest include preferred and preference
stock convertible into fixed income securities and all types of long- or
short-term debt obligations, such as bonds, debentures, notes, equipment lease
certificates, equipment trust certificates, conditional sales contracts and
commercial paper. Corporate fixed income securities may involve equity
features, such as conversion or exchange rights or warrants for the acquisition
of stock of the same or a different issuer; participations based on revenues,
sales or profits; or the purchase of common stock in a unit transaction (where
corporate debt securities and common stock are offered as a unit).
The Fund may invest in corporate debt securities which are in the lower rating
categories of recognized rating agencies (that is, ratings of Ba or lower by
Moody's Investors Service, Inc. ("Moody's"), or BB or lower by Standard &
Poor's Ratings Services ("S&P"), Duff & Phelps Credit Rating Co. ("Duff &
Phelps") or Fitch IBCA, Inc. ("Fitch")) (and comparable unrated securities)
(commonly known as "junk bonds"). For a description of these and other rating
categories, see Appendix C. See "Risk Factors -- Risks of Investment in Lower
Rated Bonds."
Municipal Obligations: The Fund may invest in municipal obligations issued by
or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies or
instrumentalities when the Adviser determines that they offer the highest
income available, except where differences in yield are not sufficient to
justify investments in higher risk securities. Such municipal obligations may
be unrated or in the medium and lower rating categories of recognized rating
agencies, which securities are speculative, involve high risk and are
questionable as to principal and interest payments.
Restricted Securities: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made, based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's limitations on investing not more
than 15% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to MFS the daily function of determining and
monitoring the liquidity of Rule 144A securities. The Board, however, retains
oversight of the liquidity determinations, focusing on factors, such as
valuation, liquidity and availability of information. Investing in Rule 144A
securities could have the effect of decreasing the level of liquidity in a Fund
to the extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A securities held in the Fund's portfolio.
Subject to the Fund's 15% limitation on investments in illiquid investments,
the Fund may also invest in restricted securities that may not be sold under
Rule 144A, which presents certain risks. As a result, the Fund might not be
able to sell these securities when the Adviser wishes to do so, or might have
to sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
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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.
Securities Purchased at a Discount: When and if available, fixed income
securities may be purchased 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.
Inverse Floating Rate Obligations: The Fund may invest in so-called "inverse
floating rate obligations" or "residual interest" bonds or other obligations or
certificates relating thereto structured to have similar features. Such
obligations generally have floating or variable interest rates that move in the
opposite direction of short-term interest rates and generally increase or
decrease in value in response to changes in short-term interest rates at a rate
which is a multiple of the rate at which fixed-rate long-term tax-exempt
securities increase or decrease in response to such changes. As a result, such
obligations have the effect of providing investment leverage and may be more
volatile than long-term fixed-rate tax-exempt obligations.
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds: Debt securities in
which the Fund may invest also include zero coupon bonds, deferred interest
bonds and bonds on which the interest is payable in kind ("PIK bonds"). Zero
coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of
return to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors than debt obligations which make regular
payments of interest. The Fund will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareholders
and which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities under disadvantageous circumstances
to satisfy the Fund's distribution obligations.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities:
The Fund may invest a portion of its assets in collateralized mortgage
obligations or "CMOs," which are debt obligations collateralized by mortgage
loans or mortgage pass-through secu-
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rities. Typically, CMOs are collateralized by certificates issued by the
Government National Mortgage Association, 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
collateral collectively referred to as "Mortgage Assets"). The Fund may also
invest a portion of its assets in multiclass pass-through securities which are
interests in a trust composed of Mortgage Assets. CMOs (which include
multiclass pass-through securities) may be issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Payments of principal of and interest on the Mortgage Assets,
and any reinvestment income thereon, provide the funds to pay debt service on
the CMOs or make scheduled distributions on the multiclass pass-through
securities. In a CMO, a series of bonds or certificates 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.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs, parallel pay CMOs and PAC Bonds and
the risks related to transactions therein, see the SAI.
Stripped Mortgage-Backed Securities: The Fund may also 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.
Other Investments: When the Adviser believes that investing for defensive
purposes is appropriate, such as during periods of unusual market conditions,
or when relative yields are deemed attractive, part or all of the Fund's assets
may be temporarily invested in cash (including foreign currency) or cash
equivalent short-term obligations including, but not limited to, certificates
of deposit, commercial paper, short-term notes, obligations issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities
and repurchase agreements.
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
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could decline). As discussed in the SAI, the Fund has adopted certain
procedures intended to minimize any risk.
Loan Participations and Other Direct Indebtedness: The Fund may invest a
portion of its assets in "loan participations and other direct indebtedness."
By purchasing a loan participation, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, and most impose restrictive covenants
which must be met by the borrower. These loans are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans may be in default at the time of
purchase. The Fund may also purchase trade or other claims against companies,
which generally represent money owed by the company to a supplier of goods and
services. These claims may also be purchased at a time when the company is in
default. Certain of the loan participations acquired by the Fund may involve
revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of
securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the Fund may
be unable to sell such investments at an opportune time or may have to resell
them at less than fair market value. For a further discussion of loan
participations and the risks related to transactions therein, see the SAI.
Indexed Securities: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or
to one or more options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself and could involve the loss
of all or a portion of the principal amount of or interest on the instrument.
Options on Securities: The Fund may write (sell) covered put and call options
on securities ("Options") and purchase put and call Options on securities that
are traded on United States and foreign securities exchanges and over the
counter. The Fund will write such Options for the purpose of increasing its
current income and/or to protect the value of its portfolio. The Fund may also
write combinations of put and call Options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk. The Fund may purchase put or call Options in
anticipation of declines in the value of portfolio securities or increases in
the value of securities to be acquired. The Fund may from time to time write
Options on all securities held in its portfolio.
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The Fund may also enter into options on the yield "spread," or yield
differential between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option
is based on the difference between the yields of designated securities rather
than the actual prices of the individual securities, and is settled through
cash payments. Accordingly, a yield curve option is profitable to the holder if
this differential widens (in the case of a call) or narrows (in the case of a
put), regardless of whether the yields of the underlying securities increase or
decrease. Yield curve options written by the Fund will be covered. The trading
of yield curve options is subject to all the risks associated with trading
other types of options, as discussed below under "Risk Factors" and in the SAI.
In addition, such options present risks of loss even if the yield on one of the
underlying securities remains constant, if the spread moves in a direction or
to an extent which was not anticipated.
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 purchase and sell options that are traded on U.S. and foreign
exchanges, and Options traded over-the-counter with broker-dealers who deal in
these Options. The ability to terminate over-the-counter Options is more
limited than with exchange-traded Options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. The Fund will treat assets used to cover over-the-counter Options
as illiquid unless the dealer is a primary dealer in U.S. Government securities
and has given the Fund the unconditional right to close such Options at a
formula price, in which event only an amount of the cover determined with
reference to the formula will be considered illiquid. The Fund may also write
over-the-counter options with non-primary dealers, including foreign dealers,
and will treat the assets used to cover these options as illiquid.
In addition, the Fund may purchase warrants on fixed income securities. A
warrant on a fixed income security is a long-dated call option conveying to the
holder of the warrant the right, but not the obligation, to purchase a fixed
income security of a specific description from the issuer on a certain date or
dates (the exercise date) at a fixed exercise price.
"Yield Curve" Options: The Fund may enter into options on the yield "spread,"
or yield differential, between two securities, a transaction referred to as a
"yield curve" option, for hedging and non-hedging (an effort to increase
current income) purposes. In contrast to other types of options, a yield curve
option is based on the difference between the yields of designated securities
rather than the actual prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease. Yield curve options written by the Fund will be covered
as described in the SAI. The trading of yield curve options is subject to all
the risks assocated with trading other types of options, as discussed below
under "Additional Risk Factors" and the SAI.
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In addition, such options present risks of loss even if the yield on one of the
underlying securities remains constant, if the spread moves in a direction or
to an extent which was not anticipated.
Options on Stock Indices: The Fund may write (sell) covered call and put
options and purchase call and put options on domestic and foreign stock
indices. The Fund may write such options for the purpose of increasing its
current income and/or to protect its portfolio against declines in the value of
securities it owns or increases in 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: The Fund may enter into
contracts for the purchase or sale for future delivery of fixed income
securities or contracts based on municipal bond or other financial indices
including any index of U.S. or foreign securities ("Futures Contracts") and may
purchase and write options to buy or sell Futures Contracts ("Options on
Futures Contracts"). Futures Contracts and Options on Futures Contracts to be
written or purchased by the Fund will be traded on U.S. and foreign exchanges.
These investment techniques are designed to hedge against anticipated future
changes in interest or exchange rates which otherwise might either adversely
affect the value of the Fund's portfolio securities or adversely affect the
prices of securities which the Fund intends to purchase at a later date, and
may also be used for non-hedging purposes to the extent permitted by applicable
law. The Fund will incur brokerage fees when it purchases and sells Futures
Contracts, and will be required to maintain margin deposits. In addition,
Futures Contracts entail risks. Although the Adviser believes that use of such
contracts will benefit the Fund, if its investment judgment about the general
direction of interest or exchange rates is incorrect, the Fund's overall
performance may be poorer than if it had not entered into any such contract and
the Fund may realize a loss. Purchases of Options on Futures Contracts may
present less risk in hedging the portfolio of the Fund than the purchase or
sale of the underlying Futures Contracts, since the potential loss is limited
to the amount of the premium paid for the option, plus related transaction
costs. The writing of such options, however, does not
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<PAGE>
present less risk than the trading of Futures Contracts, and will constitute
only a partial hedge, up to the amount of the premium received, less related
transaction costs. In addition, if an option is exercised, the Fund may suffer
a loss on the transaction.
In order to assure that the Fund will not be deemed to be a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the CFTC require
that the Fund enter into transactions in Futures Contracts, Options on Futures
Contracts and Options on Foreign Currencies traded on a CFTC-regulated exchange
only (i) for bona fide hedging purposes (as defined in CFTC regulations), or
(ii) for non-bona fide hedging purposes, provided that the aggregate initial
margin and premiums required to establish such non-bona fide hedging positions
does not exceed 5% of the liquidation value of the Fund's assets, after taking
into account unrealized profits and unrealized losses on any such contracts the
Fund has entered into, and excluding, in computing such 5%, the in-the-money
amount with respect to an option that is in-the-money at the time of purchase.
Options on Foreign Currencies: The Fund may also purchase and write options
on foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the dollar cost of foreign securities to be acquired.
As in the case of other types of options, however, the writing of an Option on
Foreign Currency will constitute only a partial hedge, up to the amount of the
premium received, and the Fund may be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an Option on Foreign Currency may constitute an effective hedge
against fluctuations in exchange rates, although, in the event of rate
movements adverse to the Fund's position, it may forfeit the entire amount of
the premium paid for the option plus related transaction costs. Options on
Foreign Currencies to be written or purchased by the Fund will be traded on
U.S. and foreign exchanges or over-the-counter.
Forward Foreign Currency Exchange Contracts: The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a fixed
quantity of a foreign currency at a future date at a price set at the time of
the contract ("Forward Contracts"). The Fund will enter into Forward Contracts
for hedging purposes as well as for the non-hedging purpose of increasing the
Fund's current income. By entering into transactions in Forward Contracts,
however, the Fund may be required to forego the benefits of advantageous
changes in exchange rates and, in the case of Forward Contracts entered into
for non-hedging purposes, the Fund may sustain losses which will reduce its
gross income. Such transactions, therefore, could be considered speculative.
Forward Contracts are traded over-the-counter, and not on organized commodities
or securities exchanges. As a result, such contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in Futures Contracts or options
traded on exchanges. The Fund may also enter into a Forward Contract on one
currency in order to hedge against risk of loss arising from fluctuations in
the value of a second currency (referred to as a "cross hedge") if, in the
judgment of the Adviser, a reasonable degree of correlation can be expected
between movements in the values of the two currencies. The Fund has established
procedures regarding the use of Forward Contracts by registered
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investment companies, which requires use of segregated assets or "cover" in
connection with the purchase and sale of such contracts.
Swaps and Related Transactions: As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party
of cash payments based upon different interest rate indexes, currencies, and
other prices or rates such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Fund might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
notional principal amount determined by the parties.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in
value if the counterparty's creditworthiness deteriorates. The Fund may also
suffer losses if it is unable to terminate outstanding swap agreements or
reduce its exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI on the risks involved in these activities.
Lending of Portfolio Securities: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made to member firms
(and subsidiaries thereof) of the New York Stock Exchange (the "Exchange") and
to member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, irrevocable letters of credit or
U.S. Treasury securities maintained on a current basis at an amount at least
equal to the market value of the securities loaned. The value of the securities
loaned, as represented by the collateral received by the Fund
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in connection with such loans, will not exceed 30% of the value of the net
assets of the Fund.
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 records these transactions as sale and purchase transactions, rather
than as borrowing transactions. 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" or Forward Delivery Securities: Securities may be purchased 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. The commitment to purchase a security for which
payment will be made on a future date may be deemed a separate security.
Although the Fund is not limited to the amount of securities for which it may
have commitments to purchase on such basis, it is expected that under normal
circumstances, the Fund will not commit more than 30% of its assets to such
purchases. The Fund does not pay for the securities until received or start
earning interest on them until the contractual settlement date. While awaiting
delivery of securities purchased on such bases, the Fund will segregate liquid
assets sufficient to cover its commitments.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund will sell securities
and receive cash proceeds, subject to its agreement to repurchase the
securities at a later date for a fixed price reflecting a market rate of
interest. There is a risk that the counterparty to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as scheduled,
which may result in losses to the Fund. The Fund will invest the proceeds
received under a reverse repurchase agreement in accordance with its investment
objective and policies. The Fund will segregate liquid assets, marked to market
daily, in an amount at least equal to the Fund's obligations under the
agreement, which is generally satisfied by the Fund providing the counterparty
with collateral in the form of the securities subject to the repurchase
agreement.
Portfolio Trading: The portfolio will be managed actively and the asset
allocations modified as the Adviser deems necessary. Although the Fund does not
intend to seek short-term profits, securities in its portfolio will be sold
whenever the Adviser believes it is appropriate to do so without regard to the
length of time the particular asset may have been held, subject to tax
requirements for the Fund's qualification as a regulated investment company. A
high turnover rate involves greater expenses, including higher brokerage and
transaction costs, to the Fund. The Fund engages in portfolio trading if the
Adviser believes a transaction net of costs (including custodian charges) will
help in achieving the Fund's investment objective. For the fiscal year ended
November 30, 1997, it is estimated that the Fund will have a portfolio turnover
rate in excess of 100%.
16
<PAGE>
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 is
execution at the most favorable prices. Consistent with the foregoing primary
consideration, the Conduct Rules of the National Association of Securities
Dealers, Inc. (the "NASD") and such other policies as the Trustees may
determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, 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.
Risk Factors
Effect of Interest Rate Changes: The value of shares of the Fund will vary as
the aggregate value of the Fund's portfolio securities increases or decreases.
The net asset value of the Fund may change as the general levels of interest
rates fluctuate. When interest rates decline, the value of a portfolio of fixed
income securities can be expected to rise. Conversely, when interest rates
rise, the value of a portfolio of fixed income securities can be expected to
decline. Moreover, the value of the lower-rated fixed income securities that
the Fund purchases will fluctuate more than the value of higher-rated fixed
income securities. These lower-rated fixed income securities generally tend to
reflect short-term corporate and market developments to a greater extent than
higher-rated securities, which react primarily to fluctuations in the general
level of interest rates. See "Risks of Investment in Lower Rated Bonds" below
for additional discussion of the risks of investing in such securities.
Although changes in the value of the Fund's portfolio 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. The dividends paid by the Fund will increase or decrease in
relation to the income received by the Fund from its investments, which will in
any case be reduced by the Fund's expenses before being distributed to the
Fund's shareholders.
If the Adviser's expectations of changes in interest rates or its evaluation of
the normal yield relationship between two securities proves to be incorrect,
the Fund's income, net asset value and potential capital gain may be decreased
or its potential capital loss may be increased. The Adviser's reallocation of
Fund assets in response to actual and anticipated market and economic changes
may result in the Fund not achieving anticipated benefits, or experiencing
losses, should the Adviser's reallocation decision be incorrect.
Risks of Investment in Lower Rated Bonds: No minimum rating standard is
required for a purchase of corporate debt securities by the Fund and the Fund
may invest in below investment grade debt securities. These securities are
considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default
17
<PAGE>
or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories and, because yields
vary over time, no specific level of income can ever be assured. These lower
rated, high yielding fixed income securities generally tend to be affected by
economic changes (and the outlook for economic growth), short-term corporate
and industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) to a greater extent than higher
rated securities, which react primarily to fluctuations in the general level of
interest rates (although these lower rated securities are also affected by
changes in interest rates. In the past, economic downturns or an increase in
interest rates have, under certain circumstances, caused a higher incidence of
default by the issuers of these securities and may do so in the future,
especially in the case of highly leveraged issuers. During certain periods, the
higher yields on the Fund's lower rated, high yielding fixed income securities
are paid primarily because of the increased risk of loss of principal and
income, arising from such factors as the heightened possibility of default or
bankruptcy of the issuers of such securities. Due to the fixed income payments
of these securities, the Fund may continue to earn the same level of interest
income while its net asset value declines due to portfolio losses, which could
result in an increase in the Fund's yield despite the actual loss of principal.
The prices for these securities may be affected by legislative and regulatory
developments. The market for these lower rated fixed income securities may be
less liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower rated securities may be affected by
the market's perception of their credit quality. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these lower
rated securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. The Fund's achievement of
its investment objective may be more dependent on the Adviser's own credit
analysis than in the case of an investment company primarily investing in
higher quality fixed income securities.
The Fund may also invest in fixed income securities rated Baa by Moody's or BBB
by S&P, Fitch or Duff & Phelps and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income securities.
Risks of Investment in Emerging Growth Companies: Investing in emerging
growth companies involves greater risk than is customarily associated with
investing in more established companies. Emerging growth companies often have
limited product lines, markets or financial resources, and they may be
dependent on one-person man-
18
<PAGE>
agement. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements
than securities of larger, more established companies or the market averages in
general. Similarly, many of the securities offering the capital appreciation
sought by the Fund will involve a higher degree of risk than would established
growth stocks. The Fund will seek to reduce risk by investing its assets in a
number of markets and issuers, performing credit analyses of potential
investments and monitoring current developments and trends in both the economy
and financial markets.
Risks of Investment in Options, Futures Contracts, Options on Futures
Contracts and Options on Foreign Currency: Although the Fund will enter into
transactions in options, Futures Contracts, Options on Futures Contracts and
Options on Foreign Currencies for hedging purposes, such transactions
nevertheless involve certain risks. For example, a lack of correlation between
the instrument underlying an option or Futures Contract and the assets being
hedged, or unexpected adverse price movements, could render the Fund's hedging
strategy unsuccessful and could result in losses. The Fund also may enter into
transactions in such instruments for other than hedging purposes, to the extent
permitted by applicable law, which involves greater risk. In particular, such
transactions may result in losses for the Fund which are not offset by gains on
other portfolio positions, thereby reducing gross income. In addition, foreign
currency markets may be extremely volatile from time to time. There also can be
no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Fund may be required to maintain a position until
exercise or expiration, which could result in losses. In addition, the Fund may
be required or may elect to receive delivery of the foreign currencies
underlying Forward Contracts or Options on Foreign Currencies, which may
involve certain risks. In such instances, the Fund may hold the foreign
currency 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 SAI contains a description of the
nature and trading mechanics of Options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies, and includes a
discussion of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
options and Futures Contracts traded by the Fund will include U.S. Government
Securities as well as foreign securities. Because longer-term U.S. Government
Securities are favorable vehicles for an option writing program, from time to
time up to 100% of the Fund's portfolio may consist of such securities. Such
securities are among the most volatile U.S. Government Securities.
Risks of Investment in Foreign Securities: Investors should recognize that
transactions involving foreign equity or debt securities or foreign currencies,
and transactions entered into in foreign countries, involve considerations and
risks not typically associated with investing in U.S. markets. These include
changes in currency rates, exchange control regulations, governmental
administration or economic or monetary policy (in the U.S. or
19
<PAGE>
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. While the
holding of foreign currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Fund
to risk of loss if such rates move in a direction adverse to the Fund's
position. Such losses could also adversely affect the Fund's hedging
strategies. See "Investment Objective, Policies and Restrictions" in the SAI
for further discussion of the holding of foreign currency, as well as the
associated risks.
Risks of Investment in 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
values of the portfolio securities, a decrease in the level of liquidity in the
Fund's portfolio or, if the Fund has entered into a contract to sell the
security, 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 prompt liquidation of substantial
holdings difficult or impossible at times. Securities of issuers located in
countries with emerging markets may have limited marketability and may be
subject to more abrupt or erratic movements.
20
<PAGE>
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental
approval for repatriation of capital, as well as by the application to the Fund
of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of the Fund.
Non-Diversified Status: The Fund has registered as a "non-diversified"
investment company. As a result, the Fund is limited as to the percentage of
its assets which may be invested in the securities of any one issuer only by
its own investment restrictions and the diversification requirements imposed by
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 a limited number of
issuers, the Fund may be more susceptible to any single economic, political or
regulatory occurrence and to the financial conditions of the issuers in which
it invests. For these reasons, an investment in shares of the Fund should not
be considered to constitute a complete investment program and may not be
appropriate for investors who cannot assume the greater risk of capital
depreciation inherent in seeking higher income and significant capital
appreciation.
----------------------
The investment objective and policies described above are not fundamental and
may be changed without shareholder approval, as may the Fund's investment
objective. A change in the Fund's investment objective may result in the Fund
having an investment objective different from the objective which the
shareholder considered appropriate at the time of investment in the Fund.
The SAI includes a discussion of investment policies and a listing of specific
investment restrictions which govern the Fund's investment policies. The
specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise. See "Investment Objective,
Policies and Restrictions" in the SAI.
Except with respect to the Fund's policy on borrowing and investing in illiquid
securities, the Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
4. MANAGEMENT OF THE FUND
Investment Adviser -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated ___________________ (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall investment
advisory ser-
21
<PAGE>
vices. James T. Swanson, a Senior Vice President of the Adviser, is the Fund's
portfolio manager. Mr. Swanson has been employed as a portfolio manager by the
Adviser since 1985 and has been the Funds' portfolio manager since its
inception. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund. For its services and facilities, the
Adviser receives an annual management fee computed and paid monthly, in an
amount equal to the sum of _____% of the average daily net assets of the Fund.
This management fee is greater than the fee paid by most funds.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS[RegTM] Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Variable Insurance Trust, MFS/Sun Life Series Trust,
and seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.), a subsidiary of Sun
Life Assurance Company of Canada ("Sun Life"), in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly-owned subsidiary,
MFS Institutional Advisors, Inc., also provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $ billion on behalf of approximately million investor
accounts as of May 31, 1998. As of such date, the MFS organization managed
approximately $ billion of assets invested in fixed income funds and fixed
income portfolios, approximately $ billion of assets in U.S. Government
Securities, and approximately $ billion of assets in equity securities. MFS
is a subsidiary of Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
which in turn is an indirect wholly owned subsidiary of Sun Life. The Directors
of MFS are Jeffrey L. Shames, Arnold D. Scott, John W. Ballen, John D. McNeil
and Donald A. Stewart. Mr. Shames is the Chairman and President and Mr. Scott
is the Secretary and a Senior Executive Vice President of MFS. Mr. Ballen is an
Executive Vice President and Chief Equity Officer of MFS. Messrs. McNeil and
Stewart are the Chairman and President, respectively, of Sun Life. Sun Life, a
mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report to the Chairman of Sun Life.
Leslie J. Nanberg, Jeffrey L. Shames, James T. Swanson, W. Thomas London,
Stephen E. Cavan, James O. Yost, Ellen Moynihan, Mark E. Bradley and James R.
Bordewick, Jr., all of whom are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far
22
<PAGE>
as the Fund is concerned, in other cases, however, it may produce increased
investment opportunities for the Fund.
Administrator -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses
MFS for a portion of the costs it incurs to provide such services.
Distributor -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
Shareholder Servicing Agent -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
5. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer. As used in the Prospectus and any appendices thereto
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to investments
in the Fund.
This Prospectus offers Class A, B and C shares to the general public 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 a Percentage of
-------------------------
Dealer Allowance
Offering Net Amount As a Percentage
Amount of Purchase 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**
</TABLE>
- ----------------
*Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
**A CDSC will apply to such purchases, as discussed below.
23
<PAGE>
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 five circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans
subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), if, prior to July 1, 1996: (a) the Plan had
established an account with the Shareholder Servicing Agent and (b) the
sponsoring organization had demonstrated to the satisfaction of MFD that
either (i) the employer had at least 25 employees or (ii) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds
would be in an amount of at least $250,000 within a reasonable period of
time, as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the retirement plan and/or sponsoring
organization subscribes to the MFS FUNDamental 401(k) Program or any
similar recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or after
July 1, 1996; and (c) the aggregate purchases by the retirement plan of
Class A shares of the MFS Funds will be in an aggregate amount of at
least $500,000 within a reasonable period of time, as determined by MFD
in its sole discretion;
(iv) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan
has, at the time of purchase, a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. The
Retirement Plan will qualify under this category only if the plan or its
sponsoring organization informs the Shareholder Servicing Agent prior to
the purchases that the plan has a market value of $500,000 or more
invested in shares of any class or classes of the MFS Funds. The
Shareholder Servicing
24
<PAGE>
Agent has no obligation independently to determine whether such a plan
qualifies under this category; and
(v) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1997; (b) such plan's
records are maintained on a pooled basis by the Shareholder Servicing
Agent; and (c) the sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of purchase, the employer has at
least 200 eligible employees and the plan has aggregate assets of at
least $2,000,000.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
<TABLE>
<CAPTION>
Commission Paid
by MFD Cumulative
to Dealers Purchase Amount
- ----------------- -------------------------------------
<S> <C>
1.00% ........... On the first $2,000,000, plus
0.80% ........... Over $2,000,000 to $3,000,000, plus
0.50% ........... Over $3,000,000 to $50,000,000, plus
0.25% ........... Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares, purchases for each
shareholder account (and certain other accounts for which the shareholder is a
record or beneficial holder) will be aggregated over a 12-month period
(commencing from the date of the first such purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Waivers of Initial Sales Charge and CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of
the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:
(i) the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates
to the satisfaction of, and certifies to the Shareholder Servicing Agent
that the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on
25
<PAGE>
or after November 1, 1997, in the event that the Plan makes a complete
redemption of all of its shares in the MFS Funds, or (b) with respect to plans
which established an account with the Shareholder Servicing Agent prior to
November 1, 1997, in the event that there is a change in law or regulation
which results in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with, any
other entity.
Class B Shares: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
Year of Redemption Contingent Deferred
After Purchase Sales Charge
- ----------------------------------------- --------------------
<S> <C>
First ......................... 4%
Second ........................ 4%
Third ......................... 3%
Fourth ........................ 3%
Fifth ......................... 2%
Sixth ......................... 1%
Seventh and following ......... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has
established its account with the Shareholder Servicing Agent on or after July
1, 1996, will be subject to the CDSC described above, only under limited
circumstances, as explained below under "Waivers of CDSC." With respect to such
purchases, MFD pays an amount to dealers equal to 3.00% of the amount purchased
through such dealers (rather than the 4.00% payment described above), which is
comprised of a commission of 2.75% plus the advancement of the first year
service fee equal to 0.25% of the purchase price payable under the Distribution
Plan. As discussed above, such retirement plans are eligible to purchase Class
A shares of the Fund at net asset value without an initial sales charge but
subject to a 1% CDSC if the plan has, at the time of purchase, a market value
of $500,000 or more invested in shares of any class or classes of the MFS
Funds. In this
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<PAGE>
event, the plan or its sponsoring organization should inform the shareholder
servicing agent that the plan is eligible to purchase Class A shares under this
category; the Shareholder Servicing Agent has no obligation independently to
determine whether such a plan qualifies under this category for the purchase of
Class A shares.
Waivers of CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated under ERISA
or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with, any other entity.
Conversion of Class B Shares. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Fund's Distribution
Plan. See "Distribution Plan" below. However, for purposes of conversion to
Class A shares, all shares in a shareholder's account that were purchased
through the reinvestment of dividends and distributions paid in respect of
Class B shares (and which have not converted to Class A shares as provided in
the following sentence) will be held in a separate sub-account. Each time any
Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to
Class A shares bear to the shareholder's total Class B shares not acquired
through reinvestment. The conversion of Class B shares to Class A shares is
subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversion will not constitute a
taxable event for federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class B shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.
Class C Shares: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year. Class C shares do not convert to any other class of shares of
the Fund. The maximum investment in Class C shares that may be made is up to
$1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such
27
<PAGE>
shares. No CDSC is assessed against shares acquired through the automatic
reinvestment of dividend or capital gain distributions. See "Redemptions and
Repurchases -- Contingent Deferred Sales Charge" below for further discussion
of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended, if the retirement plan and/or the sponsoring organization subscribe
to the MFS FUNDamental 401(k) Plan or another similar recordkeeping program
made available by the Shareholder Servicing Agent.
Waivers of CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
General: The following information applies to purchases of all classes of the
Fund's shares.
Minimum Investment. Except as described below, the minimum initial investment
is $1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
Subsequent Investment by Telephone: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on
any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify the
identity of the caller. The Shareholder Servicing Agent will request personal
or other infor-
28
<PAGE>
mation from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
Right to Reject Purchase Orders/Market Timing. Purchases and exchanges should
be made for investment purposes only. The Fund and MFD each reserves the right
to reject or restrict any specific purchase or exchange request. In the event
that the Fund or MFD rejects an exchange request, neither the redemption nor
the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more
exchange requests out of the Fund per calendar year and (ii) any one of such
exchange requests represents shares equal in value to 1/2 of 1% or more of the
Fund's net assets at the time of the request. Accounts under common ownership
or control, including accounts administered by market timers, will be
aggregated for purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose
specific limitations with respect to market timers, including delaying for up
to seven days the purchase side of an exchange request by market timers or
specifically rejecting or otherwise restricting purchase or exchange requests
by market timers. Other funds in the MFS Family of Funds may have different
and/or more or less restrictive policies with respect to market timers than the
Fund. These policies are disclosed in the prospectuses of these other MFS
Funds.
Dealer Concessions. Dealers may receive different compensation with respect to
sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all
of the Class B and/or Class C shares of certain specified MFS Funds sold by
such dealer during a specified sales period. In addition, from time to time,
MFD, at its expense, may provide additional commissions, compensation or
promotional incentives ("concessions") to dealers which sell or arrange for the
sale of shares of the Fund. Such concessions provided by MFD may include
financial assistance to dealers in connection with preapproved conferences or
seminars, sales or training programs for invited registered representatives and
other employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding
one or more MFS Funds, and/or other dealer-sponsored events. From time to time,
MFD may make expense reimbursements for special training of a dealer's
registered representatives and other employees in group meetings or to help pay
the expenses of sales contests. Other concessions may be offered to the extent
not prohibited by state laws or any self-regulatory agency, such as the NASD.
29
<PAGE>
Special Investment Programs. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal
charitable contribution on their behalf.
Restrictions on Activities of National Banks. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services
in respect of Shareholders who invested in the Fund through a national bank. It
is not expected that shareholders would suffer any adverse financial
consequence as a result of these occurrences. In addition, state securities
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
broker-dealers pursuant to state law.
----------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
Exchanges
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of
the other MFS Funds at net asset value (if available for sale). Shares of one
class may not be exchanged for shares of any other class.
Exchanges Among MFS Funds (Excluding 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
30
<PAGE>
shares or Units and will be deducted from the redemption proceeds when such
shares or Units are subsequently redeemed, assuming the CDSC is then payable
(the period during which the Class A shares and the Units were held will be
aggregated for purposes of calculating the applicable CDSC). In the event that
a shareholder initially purchases Units and then exchanges into Class A shares
subject to an initial sales charge of an MFS Fund, the initial sales charge
shall be due upon such exchange, but will not be imposed with respect to any
subsequent exchanges between such Class A shares and Units with respect to
shares on which the initial sales charge has already been paid. In the event
that a shareholder initially purchases Units and then exchanges into Class A
shares subject to a CDSC of an MFS Fund, the CDSC period will commence upon
such exchange, and the applicability of the CDSC with respect to subsequent
exchanges shall be governed by the rules set forth above in this paragraph.
General: A shareholder should read the prospectuses of the other MFS Fund
into which an exchange is made and consider the differences in objectives,
policies and restrictions before making any exchange. Exchanges will be made
only after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent in
proper form (i.e., if in writing -- signed by the record owner(s) exactly as
the shares are registered; if by telephone -- proper account identification is
given by the dealer or shareholder of record) and each exchange must involve
either shares having an aggregate value of at least $1,000 ($50 in 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.
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
31
<PAGE>
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
32
<PAGE>
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.
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.
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<PAGE>
General: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
Signature Guarantee. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
Reinstatement Privilege. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for Class C shares and certain Class A share purchases, a CDSC will be
imposed upon redemption. Such purchases under the Reinstatement Privilege are
subject to all limitations in the SAI regarding this privilege.
In-Kind Distributions. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in-kind, the
shareholder could incur brokerage or transaction charges when converting the
securities to cash.
Involuntary Redemptions/Small Accounts. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in
such account drops below $500 because of redemptions or exchanges, except in
the case of accounts being established for monthly automatic investments and
certain payroll savings programs, Automatic Exchange Plan accounts and
tax-deferred retirement plans, for which there is a lower minimum investment
requirement. See "Purchases -- General -- Minimum Investment." Shareholders
will be notified that the value of their account is less than the minimum
investment requirement and allowed 60 days to make an additional investment
before the redemption is processed.
Distribution Plan
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
34
<PAGE>
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."
Features Common to Each Class of Shares: There are features of the
Distribution Plan that are common to each class of shares, as described below.
Service Fees. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date.
Service fees may be reduced for a dealer that is the holder or dealer of record
for an investor who owns shares of the Fund having an aggregate net asset value
at or above a certain dollar level. Dealers may from time to time be required
to meet certain criteria in order to receive service fees. MFD or its
affiliates are entitled to retain all service fees payable under the
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts.
Distribution Fees. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each
class of shares. While the amount of compensation received by MFD in the form
of distribution fees during any year may be more or less than the expense
incurred by MFD under its distribution agreement with the Fund, the Fund is not
liable to MFD for any losses MFD may incur in performing services under its
distribution agreement with the Fund.
Other Common Features. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
Features Unique to Each Class of Shares: There are certain features that are
unique to each class of shares, as described below.
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<PAGE>
Class A Shares. 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 Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans of
Class A shares which are sold at net asset value but which are subject to a 1%
CDSC for one year after purchase). See "Purchases -- Class A Shares" above. In
addition, to the extent that the aggregate service and distribution fees paid
under the Distribution Plan do not exceed 0.35% per annum of the average daily
net assets of the Fund attributable to Class A shares, the Fund is permitted to
pay such distribution-related expenses or other distribution-related expenses.
Class B Shares. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above
at a rate equal to 0.25% of the purchase price of such shares and, as
compensation 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 Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
Class C Shares. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class C shares"
above. MFD will pay a commission to dealers of 1.00% of the purchase price of
Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution
and service fees paid by the Fund to MFD with respect to such shares commencing
in the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the
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Distribution Plan equal, on an annual basis, to 0.75% of the Fund's average
daily net assets attributable to Class C shares.
Current Level of Distribution and Service Fees: The Fund's Class A, Class B
and Class C distribution and service fees for its current fiscal year are
0.35%, 1.00% and 1.00% per annum, respectively.
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 distributions 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 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 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 elect to be treated and to
qualify each year as a "regulated investment company" under Subchapter M of the
Code. Because the Fund intends to distribute all of its net investment income
and net realized capital gains to its shareholders in accordance with the
timing requirements imposed by the Code, it is not expected that the Fund will
be required to pay any federal income or excise taxes, although the Fund's
foreign-source income may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, (and
any state or local taxes), on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional shares.
The Fund expects that none of its distributions will be eligible for the
dividends received deduction for corporations.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the U.S. federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital gain (as well as the rate category or
categories under which such gain is taxable),
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the portion, if any, representing a return of capital (which is free of current
taxes but which results in a basis reduction) and the amount, if any, of U.S.
federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments that are subject to such withholding and that are made to persons who
are neither citizens nor residents of the U.S. The Fund is also required in
certain circumstances to apply backup withholding at the rate of 31% on taxable
dividends and redemption proceeds paid to any shareholder (including a
shareholder who is neither a citizen nor a resident of the U.S.) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. Backup withholding will not, however, be applied
to payments that have been subject to 30% withholding. Prospective investors
should read the Fund's Account Application for information regarding backup
withholding of U.S. federal income tax and should consult their own tax
advisers as to the tax consequences to them of an investment in the Fund.
Net Asset Value
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Assets in the Fund's portfolio are valued on
the basis of their market values or otherwise at their fair values, as
described in the SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value per share of
each class of shares is effective for orders received 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 which it
offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to institutional investors, entitled Class I
shares. The Fund 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 or selection of
Trustees and accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
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
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matters. The Fund does not intend to hold annual shareholder meetings. The
Trust's Declaration of Trust provides that a Trustee may be removed from office
in certain instances (see "Description of Shares, Voting Rights and
Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth in "Purchases -- Conversion of Class B shares"). Shares are fully
paid and non-assessable. Should the Fund be liquidated, shareholders of each
class are entitled to share pro rata in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued except
in connection with pledges and assignments and in certain other limited
circumstances.
The Fund is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability would be limited to circumstances in which
both inadequate insurance existed (e.g., fidelity bonding and errors and
omissions insurance) and the Fund 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 Securities Corporation and Wiesenberger Investment Companies
Service. Yield quotations are based on the annualized net investment income per
share of each class over a 30-day period stated as a percent of the maximum
public offering price of shares of that class on the last day of that period.
The yield calculation for Class B and Class C shares assumes no CDSC is paid.
The current distribution rate for each class is generally based upon the total
amount of dividends per share paid by the Fund to shareholders of that class
during the past twelve months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of such
period. Current distribution rate calculations for Class B and Class C shares
assume no CDSC is paid. The current distribution rate differs from the yield
calculation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains, and return of invested capital, and is calculated
over a different period of time. Total rate of return quotations will reflect
the average annual percentage change over stated periods in the value of an
investment in a class of the Fund made at the maximum public offering price of
the shares of that class with all distributions reinvested and which will give
effect to the imposition of any applicable CDSC assessed upon redemptions of
the Fund's Class B and Class C shares. Such total rate of return quotations may
be accompanied by quotations which do not reflect the reduction in value of the
initial investment due to the sales charge or the deduction of a CDSC, and
which will thus be higher. The Fund may offer multiple classes of shares which
were initially offered for sale to, and purchased by, the public on different
dates (the class "inception date"). The calculation of total rate of return for
a class of shares which has a later class inception date than another class of
shares of the Fund is based both on (i) the per-
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formance of the Fund's newer class from its inception date and (ii) the
performance of the Fund's oldest class from its inception date up to the class
inception date of the newer class. See the SAI for further information on the
calculation of total rate of return for share classes with different class
inception dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as of a stated 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. A copy of the
Annual Report may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number). In addition to
information provided in shareholder reports, the Fund may, in its discretion,
from time to time make a list of all or a portion of its holdings available to
investors upon request.
Expenses
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Fund (other than those assumed by MFS) including but not
limited to: advisory and administrative services; governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable
to the Fund, fees and expenses of independent auditors, of legal counsel, and
of any transfer agent, registrar or dividend disbursing agent of the Fund;
expenses of repurchasing and redeeming shares and servicing shareholder
accounts; expenses of preparing, printing and mailing prospectuses, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions,
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the Trust's Custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing
of prospectuses are borne by the Fund except that the Distribution Agreement
with MFD requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific series
of the Trust are allocated among the series in a manner believed by management
of the Trust to be fair and equitable.
Subject to termination or revision at the sole discretion of the Adviser, the
Adviser has agreed to bear the Fund's expenses (after taking into effect any
compensating balance and offset arrangements) such that the Fund's "Other
Expenses," which are defined to include all Fund expenses except for management
fees, Rule 12b-1 fees, taxes, extraordinary expenses, brokerage and transaction
costs and class specific expenses, do not exceed % per annum of its average
daily net assets (the "Maximum Percentage").
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The payments made by the Adviser on behalf of the Fund under this arrangement
are subject to reimbursement by the Fund to the Adviser, which will be
accomplished by the payment of an expense reimbursement fee by the Fund to the
Adviser computed and paid monthly at a percentage of its average daily net
assets for its then current fiscal year, with a limitation that immediately
after such payment the Fund's "Other Expenses" will not exceed the Maximum
Percentage. The obligation of the Adviser to bear the Fund's "Other Expenses"
pursuant to this arrangement and the Fund's obligation to pay the reimbursement
fee to the Adviser terminates on the earlier of the date on which payments made
by the Fund equal the prior payment of such reimbursable expenses by the
Adviser or July 1, 2001.
6. 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 information regarding
the tax status of reportable dividends and distributions for that year (see
"Tax Status").
Distribution Options -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
--Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
--Dividends 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. Dividends
and capital gain distributions in amounts less than $10 will automatically be
reinvested in additional shares of the Fund. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash, and the postal or
other delivery service is unable to deliver checks to the shareholder's address
of record, or the shareholder does not respond to mailings from the Shareholder
Servicing Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
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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 defined
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 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, 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 the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of Class A, B and C shares of that shareholder in the MFS Funds or the 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 to him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC.
Dollar Cost Averaging Programs --
Automatic Investment Plan: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
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Automatic Exchange Plan: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an
MFS Fund for investment in the same class of shares of other MFS Funds selected
by the shareholder if such fund is available for sale. Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to six
different funds. A shareholder should consider the objectives and policies of a
fund and review its prospectus before electing to exchange money into such fund
through the Automatic Exchange Plan. No transaction fee is imposed in
connection with exchange transactions under the Automatic Exchange Plan.
However, exchanges of shares of MFS Money Market Fund, MFS Government Money
Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to any
applicable sales charge. For federal and (generally) state income tax purposes,
an exchange is treated as a sale of the shares exchanged and, therefore, could
result in a capital gain or loss to the shareholder making the exchange. See
the SAI for further information concerning the Automatic Exchange Plan.
Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the
Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal
program would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class B 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 advisers before establishing any of the tax-deferred retirement plans
described above.
----------------------
The Fund's SAI, dated July 1, 1998, as amended or supplemented from time to
time, contains more detailed information about the Fund, including, but not
limited to, information related to (i) the Fund's investment objective,
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 shares, including rights and liabilities of
shareholders; (v) tax status of dividends and distributions; (vi) the
Distribution Plan; and (vii) various services and privileges provided by the
Fund for the benefit of its shareholders, including additional information with
respect to the exchange privilege.
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APPENDIX A
Waivers of Sales Charges
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares are waived
(Section II), and the CDSC for Class B and Class C shares is waived (Section
III). As used in this Appendix, the term "dealer" includes any broker, dealer,
bank (including bank trust departments), registered investment adviser,
financial planner and any other financial institutions having a selling
agreement with MFS Fund Distributors, Inc. ("MFD").
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases
of Class A shares and the CDSC imposed on certain redemptions of Class A shares
and on redemptions of Class B and Class C shares, as applicable, is waived:
1. Dividend Reinvestment
[bullet] Shares acquired through dividend or capital gain reinvestment; and
[bullet] 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
[bullet] 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:
[bullet] Officers, eligible directors, employees (including retired
employees) and agents of Massachusetts Financial Services Company
("MFS"), Sun Life Assurance Company of Canada ("Sun Life") or any
of their subsidiary companies;
[bullet] Trustees and retired trustees of any investment company for which
MFD serves as distributor;
[bullet] Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
[bullet] Employees or registered representatives of dealers;
[bullet] Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to an MFS Fund; and
[bullet] Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI")
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4. Involuntary Redemptions (CDSC Waiver Only)
[bullet] 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")
[bullet] Death or disability of the IRA owner.
Section 401(a) Plans ("401(a) Plans") and Section 403(b) Employer Sponsored
Plans ("ESP Plans")
[bullet] Death, disability or retirement of 401(a) or ESP Plan participant;
[bullet] Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
[bullet] Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1 (d)(2), as amended from time to time);
[bullet] Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the Plan);
[bullet] Tax-free return of excess 401(a) or ESP Plan contributions;
[bullet] To the extent that redemption proceeds are used to pay expenses
(or certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor
subscribes to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping system made available by the Shareholder Servicing
Agent; and
[bullet] Distributions from a 401(a) or ESP Plan that has invested its
assets in one or more of the MFS Funds for more than 10 years from
the later to occur of: (i) January 1, 1993 or (ii) the date such
401(a) or ESP Plan first invests its assets in one or more of the
MFS Funds. The sales charges will be waived in the case of a
redemption of all of the 401(a) or ESP Plan's shares in all MFS
Funds (i.e., all the assets of the 401(a) or ESP Plan invested in
the MFS Funds are withdrawn), unless immediately prior to the
redemption, the aggregate amount invested by the 401(a) or ESP
Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of
the total value of the 401(a) or ESP Plan's assets in the MFS
Funds, in which case the sales charges will not be waived.
Section 403(b) Salary Reduction Only Plans ("SRO Plans")
[bullet] Death or disability of SRO Plan participant.
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6. Certain Transfers of Registration (CDSC Waiver Only). Shares transferred:
[bullet] 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
[bullet] From a single account maintained for a 401(a) Plan to multiple
accounts maintained by the Shareholder Servicing Agent on behalf
of individual participants of such Plan, provided that the Plan
sponsor subscribes to the MFS FUNDamental 401(k) Plan or another
similar recordkeeping system made available by the Shareholder
Servicing Agent.
7. Loan Repayments
[bullet] Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to
which such Plan or its sponsoring organization subscribes to the
MFS FUNDamental 401(k) Program or the MFS Recordkeeper Plus
Program (but not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. Wrap Account Investments and Fund "Supermarket" Investments
[bullet] Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which
include a requirement that such shares be sold for the sole
benefit of clients participating in a "wrap" account, mutual fund
"supermarket" account or a similar program under which such
clients pay a fee to such dealer.
2. Investment by Insurance Company Separate Accounts
[bullet] Shares acquired by insurance company separate accounts.
3. Retirement Plans
Administrative Services Arrangements
[bullet] Shares acquired by retirement plans or trust accounts whose third
party administrators, or dealers have entered into an
administrative services agreement with MFD or one of its
affiliates to perform certain administrative services, subject to
certain operational and minimum size requirements specified from
time to time by MFD or one or more of its affiliates.
Reinvestment of Distributions from Qualified Retirement Plans
[bullet] 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.
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Shares redeemed on account of distributions made under the following
circumstances:
IRA's
[bullet] Distributions made on or after the IRA owner has attained the age
of 59-1/2 years old; and
[bullet] Tax-free returns of excess IRA contributions.
401(a) Plans
[bullet] Distributions made on or after the 401 (a) Plan participant has
attained the age of 59-1/2 years old; and
[bullet] Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP Plans and SRO Plans
[bullet] Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59-1/2 years old.
4. Purchases of at Least $5 Million (CDSC waiver only)
[bullet] Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or
more Eligible Funds (the "Initial Purchase") (this waiver applies
to the shares acquired from the Initial Purchase and all shares of
Eligible Funds subsequently acquired by the shareholder); provided
that the dealer through which the Initial Purchase is made enters
into an agreement with MFD to accept delayed payment of
commissions with respect to the Initial Purchase and all
subsequent investments by the shareholder in the Eligible Funds
subject to such requirements as may be established from time to
time by MFD (for a schedule of the amount of commissions paid by
MFD to the dealer on such investments, see "Purchases -- Class A
Shares -- Purchases subject to a CDSC" in the Prospectus). The
Eligible Funds are all funds included in the MFS Family of Funds,
except for Massachusetts Investors Trust, Massachusetts Investors
Growth Stock Fund, MFS Municipal Bond Fund, MFS Municipal Limited
Maturity Fund, MFS Money Market Fund, MFS Government Money Market
Fund and MFS Cash Reserve Fund.
5. Bank Trust Departments and Law Firms
[bullet] Shares acquired by certain bank trust departments or law firms
acting as trustee or manager for trust accounts which have entered
into an administrative services agreement with MFD and are
acquiring such shares for the benefit of their trust account
clients.
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:
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1. Systematic Withdrawal Plan
[bullet] Systematic Withdrawal Plan redemptions with respect to up to 10%
per year (or 15% per year, in the case of accounts registered as
IRAs where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
2. Death of Owner
[bullet] 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
[bullet] 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
[bullet] Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 701/2
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")
[bullet] Distributions made on or after the SAR-SEP Plan participant has
attained the age of 701/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
[bullet] Death or disability of a SAR-SEP Plan participant.
A-5
<PAGE>
<PAGE>
APPENDIX B
Description of Obligations Issued or Guaranteed by
U.S. Government Agencies, Authorities or Instrumentalities
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.
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.
GNMA Certificates -- are mortgage-backed securities which represent partial
ownership interests 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 or the Veterans Administration or the Farmers Home
Administration.
The Fund will purchase 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.
FHLMC Bonds -- are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation and are not guaranteed by the U.S. Government.
FNMA Bonds -- are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds -- are notes and bonds issued by the
Federal Home Loan Bank System.
SLMA Debentures -- are debentures backed by the Student Loan Marketing
Association and are not guaranteed by the U.S. Government.
The list of securities set forth above does not purport to be an exhaustive
compilation of all debt obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities. The Fund reserves the right to
invest in debt obligations issued or guaranteed by U.S. Government agencies,
authorities or instrumentalities in addition to those listed above.
B-1
<PAGE>
<PAGE>
APPENDIX C
Description of Bond Ratings
The ratings of Moody's S&P, Fitch and Duff & Phelps represent their opinions as
to the quality of various bonds. It should be emphasized, however, that ratings
are not absolute standards of quality. Consequently, bonds with the same
maturity, coupon and rating may have different yields while bonds of the same
maturity and coupon with different ratings may have the same yield.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
C-1
<PAGE>
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 that are not rated as
a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Standard & Poor's Ratings Services
AAA: An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated 'AA' differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated 'A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated 'BBB' exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated 'BB' is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
C-2
<PAGE>
B: An obligation rated 'B' is MORE VULNERABLE to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated 'CCC' is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated 'CC' is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: The 'C' rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated 'D' is in payment default. The 'D' rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
Fitch IBCA, Inc.
AAA: Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A: High credit quality. 'A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
C-3
<PAGE>
BBB: Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB: Speculative. 'BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. 'B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A 'CC' rating indicates that default of some
kind appears probable. 'C' ratings signal imminent default.
DDD, DD, and D: Default. Securities are not meeting current obligations and are
extremely speculative. 'DDD' designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, 'DD' indicates expected recovery of 50%-90% of such outstandings, and
'D' the lowest recovery potential, i.e. below 50%.
Duff & Phelps Credit Rating Co.
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment grade and possession risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according
to economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a higher
or lower rating grade.
C-4
<PAGE>
CCC: Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearages.
C-5
<PAGE>
<PAGE>
Investment Adviser Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend
Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
<PAGE>
Bulk Rate
U.S. Postage
Paid
MFS
[MFS LOGO]
INVESTMENT MANAGEMENT
We invented the mutual fund[SM]
MFS[RegTM] Charter Income Fund
500 Boylston Street, Boston, MA 02116-3741
This is your fund's current prospectus. Please keep it with your financial
records because it provides important information about your investment.
MSI-1-3/98/159M 034/234/334/834
<PAGE>
MFS[RegTM] CHARTER STATEMENT OF
INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds[RegTM]) JULY 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
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<S> <C>
1. Definitions ................................................... 2
2. Investment Objective, Policies and Restrictions ............... 2
3. Management of the Fund ........................................ 14
Trustees ...................................................... 14
Officers ...................................................... 15
Investment Adviser ............................................ 16
Custodian ..................................................... 16
Shareholder Servicing Agent ................................... 16
Distributor ................................................... 16
4. Portfolio Transactions and Brokerage Commissions .............. 17
5. Shareholder Services .......................................... 18
Investment and Withdrawal Programs ............................ 18
Exchange Privilege ............................................ 20
Tax-Deferred Retirement Plans ................................. 21
6. Tax Status .................................................... 21
7. Distribution Plan ............................................. 22
8. Determination of Net Asset Value and Performance .............. 23
9. Description of Shares, Voting Rights and Liabilities .......... 26
10. Independent Auditors and Financial Statements ................. 26
</TABLE>
MFS CHARTER INCOME FUND
A Series of MFS Series Trust II
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
July 1, 1998. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number).
This SAI is not a Prospectus and is authorized for distribution to prospective
investors only if preceded or accompanied by a current Prospectus.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS[RegTM] Charter Income Fund, is a non-diversified series of MFS
Series Trust II (the "Trust"), a Massachusetts business trust.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated July 1, 1998.
2. INVESTMENT OBJECTIVE, POLICIES AND
RESTRICTIONS
Investment Objective and Policies. The investment objective and policies of the
Fund are described in the Prospectus and below. The following discussion of the
Fund's investment policies and restrictions supplements and should be read in
conjunction with the information set forth in the "Investment Objective and
Policies" section of the Prospectus.
Non-Diversified Investment Company: The Fund has registered as a
"non-diversified" investment company so that it is limited as to the percentage
of its assets which may be invested in the securities of any one issuer only by
its own investment restrictions and the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended. U.S. Government Securities,
which are generally considered free of credit risk and are assured as to
payment of principal and interest if held to maturity, are not subject to any
investment limitation. The portfolio will be managed actively and the asset
allocations modified as the Adviser deems necessary.
Foreign Securities: Investments in foreign issues involve considerations and
possible risks not typically associated with investments in securities issued
by domestic companies or with debt securities issued by foreign governments.
There may be less publicly available information about a foreign company than
about a domestic company, and many foreign companies are not subject to
accounting, auditing and financial reporting standards and requirements
comparable to those to which U.S. companies are subject. Foreign securities
markets, while growing in volume, have substantially less volume than U.S.
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. Fixed
brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. There is also less
government supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States.
American Depositary Receipts: The Fund may invest in American Depositary
Receipts ("ADRs") 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 denominated in foreign currency.
Non-Dollar Fixed Income Securities: The Fund will purchase non-dollar fixed
income securities denominated in the currency of countries where the interest
rate environment as well as the general economic climate are believed by the
Adviser to provide an opportunity for declining interest rates and currency
appreciation. If interest rates decline, such non-dollar fixed income
securities will appreciate in value. If the currency also appreciates against
the dollar, the total investment in such non-dollar fixed income securities
would be enhanced further. (For example, if United Kingdom bonds yield 14%
during a year when interest rates decline causing the bonds to appreciate by 5%
and the pound rises 3% versus the dollar, then the annual total return of such
bonds would be 22%. This example is illustrative only.) Conversely, a rise in
interest rates or decline in currency exchange rates would adversely affect the
Fund's return.
Investments in non-dollar fixed income securities are evaluated primarily on
the strength of a particular currency against the dollar and on the interest
rate climate of that country. Currency is judged 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.
Corporate Asset-Backed Securities: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related col-
2
<PAGE>
lateral. Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the automobile receivables may not have a proper security interest
in all of the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases,
be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors 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.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities:
The Fund may invest a portion of its assets in collateralized mortgage
obligations or "CMOs," which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized
by certificates issued by the Government National Mortgage Association, the
Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation, but may also be collateralized by whole loans or private mortgage
pass-through securities (such collateral collectively hereinafter referred to
"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 Fund may invest in CMOs and multiclass pass-through
securities which are issued by the U.S. Government, its agencies, authorities
or instrumentalities or private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Unless the context indicates otherwise, all references herein to CMOs include
multiclass pass-through securities. Payments of principal of and interest on
the Mortgage Assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities.
In a common CMO structure, 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 the 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 the Mortgage Assets are applied to the classes of the series of
a CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of CMOs until
all other classes having an earlier stated maturity or final distribution date
have been paid in full.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or
final distribution date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final distribution date but may
be retired earlier. PAC Bonds generally require payments of a specified amount
of principal on each payment date. PAC Bonds are always parallel pay CMOs with
the required principal payment on such securities having the highest priority
after interest has been paid to all classes.
Stripped Mortgage-Backed Securities: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies of 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. Because SMBS were
only recently introduced, established trading markets for these securities have
not yet developed, although the securities are traded among institutional
investors and investment banking firms.
3
<PAGE>
Repurchase Agreements: The Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange (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 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
amount agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the
time the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that
the seller is creditworthy, and the Adviser monitors that seller's
creditworthiness on an ongoing basis. Moreover, under such agreements, the
value of the securities (which are marked to market every business day) is
required to be greater than the repurchase price, and the Fund has the right to
make margin calls at any time if the value of the securities falls below the
agreed upon collateral.
Loan Participations and Other Direct Indebtedness: The Fund may purchase loan
participations and other direct claims against a borrower. In purchasing a loan
participation, the Fund acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at the
time of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrower's obligation, or that
the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which
the Fund would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Fund would purchase an assignment of
a portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time
when the company is in default.
Certain of the loan participations acquired by the Fund may involve revolving
credit facilities or other standby financing commitments which obligate the
Fund to pay additional cash on a certain date or on demand. These commitments
may have the effect of requiring the Fund to increase its investment in a
company at a time when the Fund might not otherwise decide to do so (including
at a time when the company's financial condition makes it unlikely that such
amounts will be repaid). To the extent that the Fund is committed to advance
additional funds, it will at all times hold and maintain in a segregated
account cash or other high grade debt obligations in an amount sufficient to
meet such commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other
direct investments which the Fund will purchase, the Adviser will rely upon its
(and not that of the original lending institution's) own credit analysis of the
borrower. As the Fund may be required to rely upon another lending institution
to collect and pass on to the Fund amounts payable with respect to the loan and
to enforce the Fund's rights under the loan, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Fund from
receiving such amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the borrower
and the lending institution as an "issuer" of the loan participation for
purposes of certain investment restrictions pertaining to the diversification
of the Fund's portfolio investments. The highly leveraged nature of many such
loans may make such loans especially vulnerable to adverse changes in economic
or market conditions. Investments in such loans may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part
owner of any collateral, and would bear the costs and liabilities associated
with owning and disposing of the collateral. In addition, it is conceivable
that under emerging legal theories of lender liability, the Fund could be held
liable as a co-lender. It is unclear whether loans and other forms of direct
indebtedness offer securities law protections against fraud and
misrepresentation. In the absence of definitive regulatory guidance, the Fund
relies on the Adviser's research in an attempt to avoid situations where fraud
or misrepresentation could adversely affect the Fund. In addition, loan
participations and other direct investments may not be in the form of
securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the Fund may
be unable to sell such investments at an opportune time or may have to resell
them at less than fair market value. To the extent that the Adviser determines
that any such investments are illiquid, the Fund will include them in the
investment limitations described below.
Options on Securities: The Fund may write (sell) covered call and put options
on securities ("Options") and purchase call
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and put Options. An Option provides the purchaser, or "holder," with the right,
but not the obligation, to purchase, in the case of a "call" Option, or sell,
in the case of a "put" Option, the security or securities in connection with
which the Option was written, for a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. The holder
pays a non-refundable purchase price for the Option, known as the "premium."
The maximum amount of risk the purchaser of the Option assumes is equal to the
premium plus related transaction costs, although this entire amount may be
lost. The risk of the seller, or "writer," however, is potentially unlimited,
unless the Option is "covered." 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 liquid assets representing the difference is segregated by the Fund.
A put option written by the Fund is "covered" if the Fund segregates liquid
assets, 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 (a) equal
to or greater than the exercise price of the put written or (b) is less than
the exercise price of the put written if liquid assets representing the
difference is segregated by the Fund in assets. 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.
The Fund may write Options for the purpose of increasing its return and for
hedging purposes. In particular, if the Fund writes an Option which expires
unexercised or is closed out by the Fund at a profit, the Fund retains the
premium paid for the Option less related transaction costs, which increases its
gross income and offsets in part the reduced value of the portfolio security in
connection with which the Option is written, or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the Option moves adversely to the Fund's position, the Option may be
exercised and the Fund will then be required to purchase or sell the security
at a disadvantageous price, which might only partially be offset by the amount
of the premium.
The Fund may write Options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call Option against that
security. The exercise price of the call Option the Fund determines to write
depends upon the expected price movement of the underlying security. The
exercise price of a call Option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the Option is written.
The writing of covered put Options is similar in terms of risk/
return characteristics to buy-and-write transactions. Put Options may be used
by the Fund in the same market environments in which call Options are used in
equivalent buy-and-write transactions.
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 U.S. 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.
The Fund may also write combinations of put and call Options on the same
security, a practice known as a "straddle." By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the Options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset, however, in whole or in part, by the premiums received
on the writing of the two Options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The writing
of straddles will likely be effective, therefore, only where the price of a
security remains stable and neither the call nor the put is exercised. In an
instance where one of the Options is exercised, the loss on the purchase or
sale of the underlying security may exceed the amount of the premiums received.
By writing a call Option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the Option. By writing a put Option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting
in a loss unless the security subsequently appreciates in value. The writing of
Options will not be undertaken by the Fund solely for hedging purposes, and may
involve certain risks which are not present in the case
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<PAGE>
of hedging transactions. Moreover, even where Options are written for hedging
purposes, such transactions will constitute only a partial hedge against
declines in the value of portfolio securities or against increases in the value
of securities to be acquired, up to the amount of the premium.
The Fund may also purchase put and call Options. Put Options are purchased to
hedge against a decline in the value of securities held in the Fund's
portfolio. If such a decline occurs, the put Options will permit the Fund to
sell the securities underlying such Options at the exercise price, or to close
out the Options at a profit. The Fund will purchase call Options to hedge
against an increase in the price of securities that the Fund anticipates
purchasing in the future. If such an increase occurs, the call Option will
permit the Fund to purchase the securities underlying such Option at the
exercise price or to close out the Option at a profit. The premium paid for a
call or put Option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the Option, and, unless the price of the
underlying security rises or declines sufficiently, the Option may expire
worthless to the Fund. In addition, in the event that the price of the security
in connection with which an Option was purchased moves in a direction favorable
to the Fund, the benefits realized by the Fund as a result of such favorable
movement will be reduced by the amount of the premium paid for the Option and
related transaction costs.
The staff of the Securities and Exchange Commission (the "SEC") has taken the
position that purchased over-the-counter Options and assets used to cover
written over-the-counter Options are illiquid and, therefore, together with
other illiquid securities, cannot exceed a certain percentage of the Fund's
assets (the "SEC illiquidity ceiling"). Although the Adviser disagrees with
this position, the Adviser intends to limit the Fund's writing of over-the-
counter Options in accordance with the following procedure. Except as provided
below, the Fund intends to write over-the-counter Options only with primary
U.S. Government securities dealers recognized by the Federal Reserve Bank of
New York. Also, the contracts the Fund has in place with such primary dealers
will provide that the Fund has the absolute right to repurchase an Option it
writes at any time at a price which represents the fair market value, as
determined in good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula in the contract.
Although the specific formula may vary between contracts with different primary
dealers, the formula will generally be based on a multiple of the premium
received by the Fund for writing the Option, plus the amount, if any, of the
Option's intrinsic value (i.e., the amount that the Option is in-the-money).
The formula may also include a factor to account for the difference between the
price of the security and the strike price of the Option if the Option is
written out-of-the-money. The Fund will treat all or a portion of the formula
as illiquid for purposes of the SEC illiquidity ceiling. The Fund may also
write over-the-counter Options with non-primary dealers, including foreign
dealers, and will treat the assets used to cover these Options as illiquid for
purposes of such illiquidity ceiling.
Yield Curve Options: The Fund may also enter into Options on the "spread," or
yield differential between two securities, in transactions referred to as
"yield curve" Options. In contrast to other types of Options, a yield curve
Option is based on the difference between the yields of designated securities,
rather than the prices of the individual securities, and is settled through
cash payments. Accordingly, a yield curve Option is profitable to the holder if
this differential widens (in the case of a call) or narrows (in the case of a
put), regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve Options may be used for the same purposes as other Options on
securities. Specifically, the Fund may purchase or write such Options for
hedging purposes. For example, the Fund may purchase a call Option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The Fund may also purchase or
write yield curve Options for other than hedging purposes (i.e., in an effort
to increase its current income) if, in the judgment of the Adviser, the Fund
will be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve Options is subject to all of
the risks associated with the trading of other types of Options. In addition,
however, such Options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or
to an extent which was not anticipated. Yield curve Options written by the Fund
will be "covered." A call (or put) Option is covered if the Fund holds another
call (or put) Option on the spread between the same two securities and
segregates liquid assets sufficient to cover the Fund's net liability under the
two Options. Therefore, the Fund's liability for such a covered Option is
generally limited to the difference between the amount of the Fund's liability
under the Option written by the Fund less the value of the Option held by the
Fund. Yield curve Options may also be covered in such other manner as may be in
accordance with the requirements of the counterparty with which the Option is
traded and applicable laws and regulations. Yield curve Options are traded
over-the-counter and because they have been only recently introduced,
established trading markets for these securities have not yet developed.
Because these securities are traded over-the-counter, the SEC has taken the
position that yield curve options are liquid and, therefore, cannot exceed the
SEC illiquidity ceiling. See "Options on Securities" above for a discussion of
the policies the Adviser intends to follow to limit the Fund's investment in
these securities.
Reset Options: In certain instances, the Fund may enter into options on U.S.
Treasury securities which provide for periodic adjustment of the strike price
and may also provide for the periodic adjustment of the premium during the term
of each such option. Like other types of options, these transactions, which may
be referred to as "reset" options or "adjustable strike" options grant the
purchaser the right to purchase (in the case of a call) or sell (in the case of
a put), a specified type of U.S. Treasury security at any time up to a stated
expiration date (or, in certain instances, on such date). In contrast to other
types of options, however, the price at which the underlying security may be
purchased or sold under a "reset" option is determined at various intervals
during the term of the option, and such price fluctuates from interval to
interval based on changes in the market value of the underlying security. As a
result, the strike price of a "reset"
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<PAGE>
option, at the time of exercise, may be less advantageous than if the strike
price had been fixed at the initiation of the option. In addition, the premium
paid for the purchase of the option may be determined at the termination,
rather than the initiation, of the option. If the premium is paid at
termination, the Fund assumes the risk that (i) the premium may be less than
the premium which would otherwise have been received at the initiation of the
option because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option.
Options on Stock Indices: As noted in the Prospectus, the Fund may write
(sell) covered call and put Options and purchase call and put Options on stock
indices. The Fund may cover call Options on stock indices by owning securities
whose price changes, in the opinion of the Adviser, are expected to be similar
to those of the underlying index, or by having an absolute and immediate right
to acquire such securities without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities in its portfolio. Where the
Fund covers a call Option on a stock index through ownership of securities,
such securities may not match the composition of the index and, in that event,
the Fund will not be fully covered and could be subject to risk of loss in the
event of adverse changes in the value of the index. The Fund may also cover
call Options on stock indices by holding a call on the same index and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if liquid assets
representing the difference is segregated by the Fund. The Fund may cover put
Options on stock indices by segregating liquid assets , or else by holding a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of the
put written if liquid assets representing the difference is segregated by the
Fund in assets. 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 indexes will increase the Fund's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the Option.
The Fund may also purchase put Options on stock indices to hedge its
investments against a decline in value. By purchasing a put Option on a stock
index, the Fund will seek to offset a decline in the value of securities it
owns through appreciation of the put Option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the Option does
not increase, the Fund's loss will be limited to the premium paid for the
Option plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Fund's security holdings.
The purchase of call Options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call Options
for this purpose, the Fund will also bear the risk of losing all or a portion
of the premium paid if the value of the index does not rise. The purchase of
call Options on stock indices when the Fund is substantially fully invested is
a form of leverage, up to the amount of the premium and related transaction
costs, and involves risks of loss and of increased volatility similar to those
involved in purchasing calls on securities the Fund owns.
Futures Contracts: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or contracts based on municipal
bond or other financial indices, including any index of U.S. or foreign
government securities as such instruments become available for trading
("Futures Contracts"). A "sale" of a Futures Contract means a contractual
obligation to deliver the securities called for by the contract at a specified
price in a fixed delivery month or, in the case of a Futures Contract on an
index of securities, to make or receive a cash settlement. A "purchase" of a
Futures Contract means a contractual obligation to acquire the securities
called for by the contract at a specified price in a fixed delivery month or,
in the case of a Futures Contract on an index of securities, to make or receive
a cash settlement. U.S. Futures Contracts have been designed by exchanges which
have been designated as "contract markets" by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
Existing contract markets include the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange. Futures
Contracts are traded on these markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange. The Fund will enter into Futures
Contracts which are based on debt securities that are backed by the full faith
and credit of the U.S. Government, such as long-term U.S. Treasury Bonds,
Treasury Notes, and three-month U.S. Treasury Bills. The Fund may also enter
into Futures Contracts which are based on corporate securities, non-U.S.
Government bonds and Eurodollar deposits.
At the same time a Futures Contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("ini-
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<PAGE>
tial deposit"). The initial deposit varies but may be as low as 5% or less of
the value of the contract. Daily thereafter, the Futures Contract is valued and
the payment of "variation margin" may be required since each day the Fund would
provide or receive cash that reflects any decline or increase in the contract's
value.
At the time of delivery of securities pursuant to a Futures Contract based on
fixed income securities, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate from
that specified in the contract. In some (but not many) cases, securities called
for by a Futures Contract may not have been issued when the contract was
written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction cancels the obligation to make or take delivery of the
securities. Since all transactions in the futures market are made, offset or
fulfilled through a clearinghouse associated with the exchange on which the
contracts are traded, the Fund will incur brokerage fees when it purchases or
sells futures contracts.
The purpose of the purchase or sale of a Futures Contract, in the case of a
portfolio, such as the portfolio of the Fund, holding long-term debt
securities, is to protect the Fund from fluctuations in interest rates without
actually buying or selling long-term debt securities. For example, if the Fund
owned long-term bonds and interest rates were expected to increase, the Fund
might enter into Futures Contracts for the sale of debt securities. If interest
rates did increase, the value of the debt securities in the portfolio would
decline, but the value of the Fund's Futures Contracts should increase at
approximately the same rate, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have. The Fund could accomplish
similar results by selling bonds with long maturities and investing in bonds
with short maturities when interest rates are expected to increase or by buying
bonds with long maturities and selling bonds with short maturities when
interest rates are expected to decline. However, since the futures market is
more liquid than the cash market, the use of Futures Contracts as an investment
technique allows the Fund to maintain a defensive position without having to
sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund could take
advantage of the anticipated rise in the value of long-term bonds without
actually buying them until the market had stabilized. At that time, the Futures
Contracts could be liquidated and the Fund could buy long-term bonds on the
cash market. Purchases of Futures Contracts would be particularly appropriate
when the cash flow from the sale of new shares of the Fund could have the
effect of diluting dividend earnings. To the extent the Fund enters into
Futures Contracts for this purpose, the assets in the segregated asset account
maintained to cover the Fund's obligations with respect to such Futures
Contracts will consist of liquid assets from the portfolio of the Fund in an
amount equal to the difference between the fluctuating market value of such
Futures Contracts and the aggregate value of the initial and variation margin
payments made by the Fund with respect to such Futures Contracts, thereby
assuring that the transactions are unleveraged.
Also, the Fund may purchase or sell stock index Futures Contracts to attempt to
protect 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.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that
use of such contracts will benefit the Fund, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, the Fund's
overall performance would be poorer than if it had not entered into any such
contract. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds held
in its portfolio and interest rates decrease instead, the Fund will lose part
or all of the benefit of the increased value of its bonds which it has hedged
because it will have offsetting losses in its futures positions. In addition,
in such situations, if the Fund has insufficient cash, it may have to sell
bonds from its portfolio to meet daily variation margin requirements. Such
sales of bonds may, but will not necessarily, be at increased prices
8
<PAGE>
which reflect the rising market. The Fund may have to sell securities at a time
when it may be disadvantageous to do so.
Options on Futures Contracts: The Fund may write and purchase options to buy
or sell Futures Contracts ("Options on Futures Contracts") for hedging
purposes. The Fund may also enter into transactions in Options on Futures
Contracts for non-hedging purposes to the extent permitted by applicable law.
The purchase of a call Option on a Futures Contract is similar in some respects
to the purchase of a call option on an individual security. Depending on the
pricing of the option compared to either the price of the Futures Contract upon
which it is based or the price of the underlying debt securities, it may or may
not be less risky than ownership of the Futures Contract or underlying debt
securities. As with the purchase of Futures Contracts, when the Fund is not
fully invested it may purchase a call Option on a Futures Contract to hedge
against a market advance due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the security underlying the Futures Contract. If
the futures price at expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium, less related
transaction costs, which provides a partial hedge against any decline that may
have occurred in the Fund's portfolio holdings. The writing of a put Option on
a Futures Contract constitutes a partial hedge against increasing prices of the
security underlying the Futures Contract. If the futures price at expiration of
the option is higher than the exercise price, the Fund will retain the full
amount of the option premium, less related transaction costs, which provides a
partial hedge against any increase in the price of securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline, a rise in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the Fund may, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease in portfolio value occurs,
it may be offset, in whole or part, by a profit on the option. Conversely,
where it is projected that the value of securities to be acquired by the Fund
will increase prior to acquisition, due to a market advance, or a decline in
interest rates or a rise in the dollar value of foreign currencies in which
securities to be acquired are denominated, the Fund may purchase call Options
on Futures Contracts, rather than purchasing the underlying Futures Contracts.
As in the case of Options, the writing of Options on Futures Contracts may
require the Fund to forego all or a portion of the benefits of favorable
movements in the price of portfolio securities, and the purchase of Options on
Futures Contracts may require the Fund to forego all or a portion of such
benefits up to the amount of the premium paid and related transaction costs.
The 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
addition to the correlation risks discussed above, the purchase of an option
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 purchased.
The Fund's ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments. It
is impossible to predict the amount of trading interest that may exist in
various types of options or futures. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. Furthermore, the Fund's ability to engage in options and
futures transactions may be limited by tax considerations.
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
liquid assets representing the difference is segregated by the Fund. The Fund
may cover the writing of put Options on Futures Contracts (a) through sales of
the underlying Futures Contract, (b) through segregation of liquid assets in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written, or
is less than the exercise price of the put written if liquid assets
representing the difference is segregated by the Fund in assets. 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. An Option on a Futures Contract
is traded on the same contract market as the underlying Futures Contact,
subject to regulation by the CFTC and the performance guarantee of the exchange
clearing house. Options on Futures Contracts, as noted in the Prospectus, are
also traded on foreign exchanges.
Forward Contracts: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may also
enter into Forward Contracts for "cross-hedging" as noted in the Prospectus.
The
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Fund may enter into Forward Contracts for hedging purposes as well as for
non-hedging purposes. Transactions in Forward Contracts entered into for
hedging purposes will include forward purchases or sales of foreign currencies
for the purpose of protecting the dollar value of fixed income securities
denominated in a foreign currency or protecting the dollar equivalent of
interest or dividends to be paid on such securities. By entering into such
transactions, however, the Fund may be required to forego the benefits of
advantageous changes in exchange rates. The Fund may also enter into
transactions in Forward Contracts for other than hedging purposes which
presents greater profit potential but also involves increased risk. For
example, if the Adviser believes that the value of a particular foreign
currency will increase or decrease relative to the value of the U.S. dollar,
the Fund may purchase or sell such currency, respectively, through a Forward
Contract. If the expected changes in the value of the currency occur, the Fund
will realize profits which will increase its gross income. Where exchange rates
do not move in the direction or to the extent anticipated, however, the Fund
may sustain losses which will reduce its gross income. Such transactions,
therefore, could be considered speculative.
The Fund has established procedures which require the use of segregated assets
or "cover" in connection with the purchase and sale of such contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets in an amount
equal to the value of its commitments under Forward Contracts. 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: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of
such securities, the Fund may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Fund deriving from purchases of foreign currency options
would be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in foreign
currency options, which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for hedging purposes in a
manner similar to the way Forward Contracts will be utilized. For example,
where the Fund anticipates a decline in the dollar value of foreign-
denominated securities due to adverse fluctuations in exchange rates it may,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurred, the option would most likely not be
exercised, and the diminution in value of portfolio securities would be offset
by the amount of the premium received less related transaction costs.
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. 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, less transaction costs, 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.
All call and put options written on foreign currencies will be covered. A call
option written on foreign currencies by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration segregated by the Fund)
upon conversion or exchange of other foreign currency held in its portfolio. A
call option is also covered if the Fund has a call on the same foreign currency
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 liquid
assets representing the difference is segregated by the Fund. A put option
written by the Fund is "covered" if the Fund segregates liquid assets with a
value equal to the exercise price, or else holds a put on the same security and
in the same principal amount as the put written where the exercise price of the
put held (a) is equal to or greater than the exercise price of the put written
or (b) is less than the exercise price of the put written if liquid assets
representing the difference are segregated by the Fund in assets. Call and put
options on foreign currencies 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 rules and
regulations.
Additional Risks of Investing in Options on Securities, Options on Stock
Indices, Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies. Unlike transactions entered into by the Fund in Futures Contracts,
options on foreign currencies and Forward Contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain for-
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eign currency options) by 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. Similarly, options on securities and on stock
indices may be traded over-the-counter. 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.
The Fund's ability effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, and Forward Contracts will
depend on the degree to which price movements in the underlying instruments
correlate with price movements in the relevant portion of the Fund's portfolio.
If the values of fixed income portfolio securities being hedged do not move in
the same amount or direction as the instruments underlying options, Futures
Contracts or Forward Contracts traded, the Fund's hedging strategy may not be
successful and the Fund could sustain losses on its hedging strategy which
would not be offset by gains on its portfolio. It is also possible that there
may be a negative correlation between the instrument underlying an option,
Futures Contract or Forward Contract traded and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
portfolio securities. In such instances, the Fund's overall return could be
less than if the hedging transaction had not been undertaken. In the case of
futures and options on fixed income securities, the portfolio securities which
are being hedged may not be the same type of obligation underlying such
contract. As a result, the correlation probably will not be exact.
Consequently, the Fund bears the risk that the price of the fixed income
portfolio securities being hedged will not move in the same amount or direction
as the underlying index or obligation. Where the Fund enters into Forward
Contracts as a "cross hedge" (i.e., the purchase or sale of a Forward Contract
on one currency to hedge against risk of loss arising from changes in value of
a second currency), the Fund incurs the risk of imperfect correlation between
changes in the values of the two currencies, which could result in losses.
The correlation between prices of fixed income securities and prices of
options, Futures Contracts or Forward Contracts may be distorted due to
differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the option, Futures Contract and Forward Contract markets. Due
to the possibility of distortion, a correct forecast of general interest rate
trends by the Adviser may still not result in a successful transaction. The
trading of Options on Futures Contracts also entails the risk that changes in
the value of the underlying Futures Contract will not be fully reflected in the
value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity or termination date of the option, Futures
Contract or Forward Contract approaches.
The trading of options, Futures Contracts and Forward Contracts also entails
the risk that, if the Adviser's judgment as to the general direction of
interest or exchange rates is incorrect, the Fund's overall performance may be
poorer than if it had not entered into any such contract. For example, if the
Fund has hedged against the possibility of an increase in interest rates, and
rates instead decline, the Fund will lose part or all of the benefit of the
increased value of the fixed income securities being hedged, and may be
required to meet ongoing daily variation margin payments.
It should be noted that the Fund may purchase and write Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes to the extent permitted by
applicable law for the purpose of increasing its return. As a result, the Fund
will incur the risk that losses on such transactions will not be offset by
corresponding increases in the value of fixed income portfolio securities or
decreases in the cost of fixed income securities to be acquired.
Potential Lack of a Liquid Secondary Market -- Prior to exercise or expiration,
a position in an exchange-traded Option, Futures Contract, Option on a Futures
Contract or Option on a Foreign Currency can only be terminated by entering
into a closing purchase or sale transaction, which requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. If no such market exists, it may not be possible to close out a
position, and the Fund could be required to purchase or sell the underlying
instrument or meet ongoing variation margin requirements. The inability to
close out option or futures positions also could have an adverse effect on the
Fund's ability effectively to hedge its portfolio.
The liquidity of a secondary market in an option or Futures Contract may be
adversely affected by "daily price fluctuation limits", established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions,
exchange or clearing corporation equipment failures, government intervention,
insolvency of a brokerage firm, intervening broker or clearing corporation or
other disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation
margin payments.
Options on Futures Contracts -- In order to profit from the purchase of an
Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to
the risks of futures
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trading, including the requirement of initial and variation margin deposits.
Additional Risks of Transactions Related to Foreign Currencies and Transactions
Not Conducted on U.S. Exchanges -- The available information on which the Fund
will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, and the markets for foreign securities as well as markets in
foreign countries may be operating during non-business hours in the U.S.,
events could occur in such markets which would not be reflected until the
following day, thereby rendering it more difficult for the Fund to respond in a
timely manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses.
Further, over-the-counter transactions are not subject to the performance
guarantee of an exchange clearing house and the Fund will therefore be subject
to the risk of default by, or the bankruptcy of, a financial institution or
other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on 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. Moreover, the SEC or CFTC have jurisdiction
over the trading in the U.S. of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Fund to enter into the trading
strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of
such securities, in the foreign currencies in which such securities are
denominated. The Fund may also be required to receive delivery of the foreign
currencies underlying options on foreign currencies or Forward Contracts it has
entered into. This could occur, for example, if an option written by the Fund
is exercised or the Fund is unable to close out a Forward Contract it has
entered into. In addition, the Fund may elect to take delivery of such
currencies. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies are
received or the Adviser anticipates, for any other reason, that the exchange
rate will improve, the Fund may hold such currencies for an indefinite period
of time. While the holding of currencies will permit the Fund to take advantage
of favorable movements in the applicable exchange rate, such strategy also
exposes the Fund to risk of loss if exchange rates move in a direction adverse
to the Fund's position. Such losses could reduce any profits or increase any
losses sustained by the Fund from the sale or redemption of securities and
could reduce the dollar value of interest or dividend payments received.
Risks of Investments in Emerging Markets: Investments in emerging markets
involve special risks. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers.
These securities may be considered speculative and, while generally offering
higher income and the potential for capital appreciation, may present
significantly greater risk. Emerging markets may have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of
the Fund is uninvested and no return is earned thereon. The inability of the
Fund to make intended security purchases due to settlement problems could cause
the Fund to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result in losses to the
Fund due to subsequent declines in values of the portfolio securities or, if
the Fund has entered into a contract to sell the security, possible liability
to the purchaser. Certain markets may require payment for securities before
delivery.
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.
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 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 a daily value at
least equal
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to the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net basis,
it will maintain liquid assets with a value equal to the full amount of the
Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If 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.
When-Issued or Forward Delivery Securities: When the Fund commits to purchase
a security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC
concerning such purchases. Since that policy currently recommends that an
amount of the Fund's assets equal to the amount of the purchase be held aside
or segregated to be used to pay for the commitment, the Fund will always have
liquid assets sufficient to cover any commitments or to limit any potential
risk. However, although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of the SEC policy,
purchases of securities on such 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 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.
Indexed Securities: The Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (i.e. principal value) or coupon rate is determined by reference to a
specific instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price of gold,
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be 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 deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Lending of Fixed Income Securities: The Fund may seek to increase its income
by lending fixed income portfolio securities. Such loans will usually be made
only to member firms of the New York Stock Exchange (the "Exchange") (and
subsidiaries thereof) and member banks of the Federal Reserve System, and would
be required to be secured continuously by collateral in cash, an irrevocable
letter of credit or U.S. Treasury securities maintained on a current basis at
an amount at least equal to the market value of the securities loaned. 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). For the duration of a loan, the Fund would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned. The Fund would also receive a fee from the borrower. The fund would
receive compensation based on investment of cash collateral, less a fee paid to
the borrower, if the collateral is in the form of cash. The Fund would not,
however, have the right to vote any securities having voting rights during the
existence of the loan, but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing, and when, in the judgment of the Adviser, the
consideration which could be earned currently from securities loans of this
type justifies the attendant risk. If the Adviser determines to make securities
loans, it is not intended that the value of the securities loaned would exceed
30% of the value of the Fund's total net assets.
Mortgage "Dollar Roll" Transactions: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund
foregoes principal and interest paid on the mortgage-backed securities. The
Fund is compensated for the lost interest by the difference between the current
sales price and
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the lower price for the futures 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.
Portfolio Management: Although the Fund does not intend to seek short-term
profits, securities in its portfolio will be sold whenever the Adviser believes
it is appropriate to do so without regard to the length of time the particular
asset may have been held, subject to tax requirements for the Fund's
qualification as a regulated investment company. A high turnover rate involves
greater expenses, including higher brokerage and transactions costs, to the
Fund. The Fund engages in portfolio trading if it believes a transaction net of
costs (including custodian charges) will help in achieving its investment
objective. See "Portfolio Transactions and Brokerage Commissions" below.
------------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
Investment Restrictions. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than
50% of the outstanding shares of the Fund (or a class, as applicable) or (ii)
67% or more of the outstanding shares of the Fund (or a class, as applicable)
present at a meeting at which holders of more than 50% of the outstanding
shares of the Fund (or a class, as applicable) are represented in person or by
proxy):
The Fund may not:
(1) borrow amounts from banks in excess of 331/3% of its total assets, including
amounts borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund may
technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (excluding securities secured by real estate or
interests therein and securities of companies, such as real estate
investment trusts, which deal in real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(excluding Options, Options on Futures Contracts, Options on Stock Indices,
Options on Foreign Currency and any other type of option, Futures Contracts,
any other type of futures contract, and Forward Contracts) in the ordinary
course of its business. The Fund reserves the freedom of action to hold and
to sell real estate, mineral leases, commodities or commodity contracts
(including Options, Options on Futures Contracts, Options on Stock Indices,
Options on Foreign Currency and any other type of option, Futures Contracts,
any other type of futures contract, and Forward Contracts) acquired as a
result of the ownership securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any
type of option (including Options on Futures Contracts, Options on Stock
Indices and Options on Foreign Currencies), short sale, Forward Contracts,
Futures Contracts, any other type of futures contract, and collateral
arrangements with respect to initial and variation margin, are not deemed to
be the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of short-term
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of the
Fund's assets in repurchase agreements, shall not be considered the making
of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, 25% or more of its total assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended, or, in the
case of unlisted securities, where no market exists), if more than 15% of a
Fund's net assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will be
deemed to be illiquid for purposes of the Fund's limitation on investment in
illiquid securities. Securities that are not registered under the 1933 Act
and sold in reliance on Rule 144A thereunder, but are determined to be
liquid by the Trust's Board of Trustees (or its delegee), will not be
subject to this 15% limitation;
(2) invest for the purpose of exercising control or management; or
(3) pledge, mortgage or hypothecate in excess of 331/3% of its total assets. For
purposes of this restriction, collateral arrangements with respect to any
type of option (including Options on Futures Contracts, Options, Options on
Stock Indices and Options on Foreign Currencies), any short sale, any type
of futures contract (including Futures Contracts), Forward Contracts and
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of
the Fund. The Adviser is responsible for the investment management of the
Fund's assets, and the officers of the Trust are responsible for its
operations. The Trustees and officers are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
Trustees
Richard B. Bailey* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, Former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
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Marshall N. Cohan (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
Lawrence H. Cohn, M.D. (born 3/11/37)
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical
School, Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
The Hon. Sir J. David Gibbons, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; Colonial Insurance Company
Ltd., Chairman; The Bank of NT Butterfield & Son Limited, Chairman; (prior to
November, 1997).
Address: 21 Reid Street, Hamilton, Bermuda HM 12
Abby M. O'Neill (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
Walter E. Robb, III (born 7/9/27)
Benchmark Advisors, Inc., (Financial Consultants) President and Treasurer;
Benchmark Consulting Group, Inc. (office services), President; Landmark Funds
(Mutual Fund), Trustee
Address: 110 Broad Street, Boston, Massachusetts
Arnold D. Scott* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
Jeffrey L. Shames,* Trustee and Vice President (born 6/2/55)
Massachusetts Financial Services Company, Chairman, Chief Executive Officer
and President
J. Dale Sherratt (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
Ward Smith (born 9/13/30)
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manu facturer), Director
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
Officers
Leslie J. Nanberg,* Vice President (born 11/4/45)
Massachusetts Financial Services Company, Senior Vice
President
James T. Swanson,* Vice President (born 6/12/49)
Massachusetts Financial Services Company, Senior Vice
President
W. Thomas London,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice
President
Stephen E. Cavan,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
James O. Yost,* Assistant Treasurer (born 6/12/60) Massachusetts Financial
Services Company, Vice President
Ellen Moynihan,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touche LLP, Senior Manager (until September 1996)
Mark E. Bradley,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March, 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
James R. Bordewick, Jr.,* Assistant Secretary (born 3/6/59) Massachusetts
Financial Services Company, Senior Vice President and Associate General
Counsel
- ----------------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
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. Each Trustee and officer holds comparable positions with certain
affiliates of MFS or with certain other funds of which MFS or a subsidiary is
the investment adviser or distributor. Messrs. Shames and Scott, Directors of
MFD, and Mr. Cavan, the Secretary of MFD, hold similar positions with certain
other MFS affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)"), the corporate parent of MFS.
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 Fund for
Messrs. Scott and Shames. The Fund will accrue compensation expenses each year
to cover current year's service and amortize past service cost.
The Declaration of Trust provides that it 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
Fund, unless as to liability to the Fund or its shareholders, it is determined
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Fund. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
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Investment Adviser
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., which in turn is an indirect wholly owned subsidiary of Sun
Life Assurance Company of Canada ("Sun Life").
Investment Advisory Agreement -- The Adviser manages the Fund pursuant to an
Investment Advisory Agreement, dated , 2000 (the "Advisory
Agreement"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee,
computed and paid monthly, in an amount equal to ___% of the average daily net
assets of the Fund.
The Adviser pays the compensation of the Trust's officers and of any Trustee
who is an officer of the Adviser. The Adviser also furnishes at its own expense
all necessary administrative services, including office space, equipment,
clerical personnel, investment advisory facilities, and all executive and
supervisory personnel necessary for managing the Fund's investments, effecting
its portfolio transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until , 2000 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions")
and, in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Fund's shares (as defined in
"Investment Objective, Policies and Restrictions"), or by either party on not
more than 60 days' nor less than 30 days' written notice. The Advisory
Agreement provides that if MFS ceases to serve as the Adviser to the Fund, the
Fund will change its name so as to delete the initials "MFS" and that MFS may
render services to others and may permit other fund clients to use the initials
"MFS" in their names. The Advisory Agreement also provides that neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution and management of the Fund, except for willful misfeasance,
bad faith or gross negligence in the performance of its or their duties or by
reason of reckless disregard of its or their obligations and duties under the
Advisory Agreement.
Administrator -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses
MFS for a portion of the costs it incurs to provide such services.
Custodian
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund.
Shareholder Servicing Agent
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS , is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement dated September 10, 1986 (the "Agency
Agreement") with the Fund. The Shareholder Servicing Agent's responsibilities
under the Agency Agreement include administering and performing transfer agent
functions and the keeping of records in connection with the issuance, transfer
and redemption of each class of shares of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee calculated as a percentage of
the average daily net assets of the Fund at an effective annual rate of
0.1125%. 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 of the Fund, has contracted with the Shareholder Servicing
Agent to perform certain dividend disbursing agent functions for the Fund.
Distributor
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement dated as of
January 1, 1995.
Class A Shares: MFD acts as agent in selling shares of the Fund to dealers.
The public offering price of Class A shares of the Fund is their net asset
value next computed after the sale plus a sales charge which varies based upon
the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation). A group might qualify
to obtain quantity sales charge discounts (see "Investment and Withdrawal
Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD
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<PAGE>
and/or the Fund have business relationships, and because the sales effort, if
any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of the Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described
in the Prospectus.
Class B, Class C and Class I Shares: MFD acts as agent in selling Class B,
Class C and Class I shares of the Fund. The public offering price of Class B,
Class C and Class I shares is their net asset value next computed after the
sale (see "Purchases" in the Prospectus and the Prospectus Supplement pursuant
to which Class I shares are offered).
General: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers
for the purchase of Fund shares.
The Distribution Agreement will remain in effect until August 1, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions
- -- Investment Restrictions") and in either case, by a majority of the Trustees
who are not parties to the Distribution Agreement or interested persons of any
such party. The Distribution Agreement terminates automatically if it is
assigned and may be terminated without penalty by either party on not more than
60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser in a similar capacity. Changes in
the Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
U.S. and in some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries both debt and equity securities
are traded on exchanges at fixed commission rates. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized by
the Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD") and such other
policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of the other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the Adviser, an
amount of commission for effecting a securities transaction for the Fund in
excess of the amount other broker-dealers would have charged for the
transaction, if the Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing broker-dealer viewed in terms of either a
particular transaction or their respective overall responsibilities to the Fund
or to their other clients. Not all of such services are useful or of value in
advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts; and effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold from time to time through such broker-dealers on behalf of
the Fund. The Trustees
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(together with the Trustees of the other MFS Funds) have directed the Adviser
to allocate a total of $54,160 of commission business from the MFS Funds to the
Pershing Division of Donaldson, Lufkin and Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality
of Research provided by brokers. The Adviser sometimes uses evaluations
resulting from this effort as a consideration in the selection of brokers to
execute portfolio transactions.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research service. To the
extent the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed those
that might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and research, by an amount which cannot be presently
determined. Such services would be useful and of value to the Adviser in
serving both the Fund and other clients and, conversely, such services obtained
by the placement of brokerage business of other clients would be useful to the
Adviser in carrying out its obligations to the Fund. While such services are
not expected to reduce the expenses of the Adviser, the Adviser would, through
use of the services, avoid the additional expenses which would be incurred if
it should attempt to develop comparable information through its own staff.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or any subsidiary of the Adviser. Investment decisions for the Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. In other cases, however, the Fund
believes that its ability to participate in volume transactions will produce
better executions for the Fund.
5. SHAREHOLDER SERVICES
Investment and Withdrawal Programs
The Fund makes available the following programs designed to enable shareholders
to add to their investment or withdraw from it with a minimum of paper work.
These are described below and, in certain cases, in the Prospectus. The
programs involve no extra charge to shareholders (other than a sales charge in
the case of certain Class A share purchases) and may be changed or discontinued
at any time by a shareholder or the Fund.
Letter of Intent -- If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with 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 nor capital gain
distributions taken in additional shares will apply toward the completion of
the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder
or to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in
the premises.
Right of Accumulation -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all holdings of
Class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed
Fund (a bank collective
18
<PAGE>
investment fund) reaches a discount level. For example, if a shareholder owns
shares with a current offering price value of $75,000 and purchases an
additional $25,000 of Class A shares of the Fund, the sales charge for the
$25,000 purchase would be at the rate of 4% (the rate applicable to single
transactions of $100,000). A shareholder must provide the Shareholder Servicing
Agent (or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the investment
is made.
Subsequent Investment by Telephone: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on
any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing
net asset value of the shares purchased on that day. The Shareholder Servicing
Agent may be liable for any losses resulting from unauthorized telephone
transactions if it does not follow reasonable procedures designed to verify the
identity of the caller. The Shareholder Servicing Agent will request personal
or other information from the caller, and will normally also record calls.
Shareholders should verify the accuracy of confirmation statements immediately
after their receipt.
Distribution Investment Program -- Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at 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 certain limited
circumstances. The aggregate withdrawals of Class B shares in any year pursuant
to a SWP generally are limited to 10% of the value of the account at the time
of establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in
the following order: (i) any "Reinvested Shares"; (ii) to the extent necessary,
any "Free Amount"; and (iii) to the extent necessary, the earliest "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. Maintaining a withdrawal plan
concurrently with an investment program would be disadvantageous because of the
sales charges included in share purchases. The shareholder may deposit into the
account additional shares of the Fund, change the payee or change the dollar
amount of each payment. The Shareholder Servicing Agent may charge the account
for services rendered and expenses incurred beyond those normally assumed by
the Fund with respect to the liquidation of shares. No charge is currently
assessed against the account, but one could be instituted by the Shareholder
Servicing Agent on 60 days' notice in writing to the shareholder in the event
that the Fund ceases to assume the cost of these services. The Fund may
terminate any SWP for an account if the value of the account falls below $5,000
as a result of share redemptions (other than as a result of a SWP) or an
exchange of shares of the Fund for shares of another MFS Fund. Any SWP may be
terminated at any time by either the shareholder or the Fund.
Invest by Mail: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
Group Purchases: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups; and
(4) agrees to provide certification of membership of those members investing
money in the MFS Funds upon the request of MFD.
Automatic Exchange Plan: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds, if available for sale, selected by the shareholder. Under
the Automatic Exchange Plan, exchanges of at least $50 each may be made to up to
six different funds effective on the seventh day of each month or of every third
month,
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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 service fee for exchanges will be charged in connection with the Automatic
Exchange Plan. However, exchanges of shares of MFS Money Market Fund, MFS
Government Money Market Fund and Class A shares of MFS Cash Reserve Fund will
be subject to any applicable sales charge. Changes in amounts to be exchanged
to each fund, the funds to which exchanges are to be made and the timing of
exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request is
received by telephone or in writing before the close of business on the last
business day of a month, the Exchange Change Request will be effective for the
following month's transfer.
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 is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
Reinstatement Privilege: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where shares
of such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and,
if applicable, with credit for any CDSC paid. In the case of proceeds
reinvested in MFS Money Market Fund, MFS Government Money Market Fund and Class
A shares of MFS Cash Reserve Fund, the shareholder has the right to exchange
the acquired shares for shares of another MFS Fund at net asset value pursuant
to the exchange privilege described below. Such a reinvestment must be made
within 90 days of the redemption and is limited to the amount of the redemption
proceeds. If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or 12 months of the
initial purchase in the case of Class C shares and certain Class A shares, a
CDSC will be imposed upon redemption. Although redemptions and repurchases of
shares are taxable events, a reinvestment within such 90-day period of time in
the same fund may be considered a "wash sale" and may result in the inability
to recognize currently all or a portion of a loss realized on the original
redemption for federal income tax purposes. Please see your tax advisor for
further information.
Exchange Privilege
Subject to the requirements set forth below, some or all of the shares of the
same class in an account with the Fund for which payment has been received by
the Fund (i.e. an established account) may be exchanged for shares of the same
class of any of the other MFS Funds (if available for sale and if the purchaser
is eligible to purchase the class of shares) at net asset value. Exchanges will
be made only after instructions in writing or by telephone (an "Exchange
Request") are received for an established account by the Shareholder Servicing
Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to the MFS Fundamental 401(k) Plan or another similar
401(k) recordkeeping system made available by the Shareholder Servicing Agent)
or all the shares in the account. Each exchange involves the redemption of the
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS Fund. Any
gain or loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and
the shares surrendered in the exchange are held in a tax-deferred retirement
plan or other tax-exempt account. No more than five exchanges may be made in
any one Exchange Request by telephone. If the Exchange Request is received by
the Shareholder Servicing Agent prior to the close of regular trading on the
New York Stock Exchange (the "Exchange"), the exchange usually will occur on
that day if all the requirements set forth above have been complied with at
that time. However, payment of the redemption proceeds by the Fund, and thus
the purchase of shares of the other MFS Fund, may be delayed for up to seven
days if the Fund determines that such a delay would be in the best interest of
all its shareholders. Investment dealers which have satisfied criteria
established by MFD may also communicate a shareholder's Exchange Request to MFD
by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
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acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. Any gain or loss on the redemption of
the shares exchanged is reportable on the shareholder's federal income tax
return, unless such shares were held in a tax-deferred retirement plan.
Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other fund and consider the differences
in objectives and policies before making any exchange. Shareholders of the
other MFS Funds (except MFS Money Market Fund and MFS Government Money Market
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 (a bank collective
investment fund) have the right to exchange their units (except units acquired
through direct purchases) for shares of the Fund, subject to the conditions, if
any, imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents of
such states. Investors should consult with their own tax advisers to be sure
this is an appropriate investment, based on their residency and each state's
income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
Tax-Deferred Retirement Plans
Shares of the Fund may be purchased by all types of tax-deferred retirement
plans. MFD makes available through investment dealers plans and/or custody
agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-employed
spouses who desire to make limited contributions to a tax-deferred
retirement program and, if eligible, to receive a federal income tax
deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986 (the "Code"), as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested
automatically. For further details with respect to any plan, including fees
charged by the trustee, custodian or MFD, tax consequences and redemption
information, see the specific documents for that plan. Plan documents other
than those provided by MFD may be used to establish any of the plans described
above. Third party administrative services, available for some corporate plans,
may limit or delay the processing of transactions.
Investors should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
The Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular U.S. 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 U.S. federal income taxes,
and any state or local taxes, on the dividends and capital gain distributions
they receive from the Fund. Dividends from ordinary income and any
distributions from net short-term capital gains, are taxable to shareholders as
ordinary income for U.S. federal income tax purposes whether the distributions
are paid in cash or reinvested in additional shares. Because the Fund intends
to earn primarily interest income, it is expected that no Fund dividends will
qualify for the dividends received deduction for corporations. 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 gains
(i.e., the excess of net long-term capital gains over net short-term capital
losses), whether paid in cash or reinvested in additional shares, are taxable
to shareholders as long-term capital gains for U.S. federal income tax purposes
without regard to the length of time the shareholders have held shares. Such
capital gains will generally be taxable to shareholders as if the shareholders
had directly realized gains from the same sources from which they were realized
by the Fund. 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 U.S. 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.
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In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than eighteen
months. However, any loss realized upon a disposition of shares in the Fund
held for six months or less will be treated as a long-term capital loss to the
extent of any distributions of net capital gain made with respect to those
shares. Any loss realized upon a disposition of shares may also be disallowed
under rules relating to wash sales. Gain may be increased (or loss reduced)
upon a redemption of Class A shares of the Fund within 90 days after their
purchase (including purchases by exchange or by reinvestment) followed by any
purchase without payment of an additional sales charge of Class A shares of the
Fund or of another MFS Fund (or any other shares of an MFS Fund generally sold
subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon securities, deferred interest bonds, payment-in- kind
bonds, certain stripped securities, and certain securities purchased at a
market discount will cause the Fund to recognize income prior to the receipt of
cash payments with respect to those securities. In order to distribute this
income and avoid a tax on the Fund, the Fund may be required to liquidate
portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Fund. An
investment in residual interests of a CMO that has elected to be treated as a
real estate mortgage investment conduit, or "REMIC", can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
The Fund's transactions in options, Futures Contracts, Forward Contracts and
swaps and related transactions will be subject to special tax rules that may
affect the amount, timing and character of Fund income and distributions to
shareholders. For example, certain positions held by the Fund on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed out) on that day, and any gain or loss associated with the positions
will be treated as 60% long-term and 40% short-term capital gain or loss.
Certain positions held by the Fund that substantially diminish its risk of loss
with respect to 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 for
nonhedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. The
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund,
the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold.
Investment income received by the Fund from foreign securities may be subject
to foreign income taxes withheld at the source; the Fund does not expect to be
able to pass through to shareholders foreign tax credits with respect to such
foreign taxes. The United States has entered into tax treaties with many
foreign countries that may entitle the Fund to a reduced rate of tax or an
exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
Fund's effective rate of foreign tax in advance since the amounts of the Fund's
assets to be invested within various countries are not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax payments at the rate of 30% (or any lower
rate permitted under an applicable treaty) on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at the rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. The Fund intends to
advise shareholders of the extent, if any, to which its distributions consist
of such interest. Shareholders are urged to consult their tax advisers
regarding the possible exclusion of such portion of their dividends for state
and local income tax purposes as well as regarding the tax consequences of an
investment in the Fund.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after
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having concluded that there is a reasonable likelihood that the Distribution
Plan would benefit the Fund and each respective class of shareholders. The
provisions of the Distribution Plan are severable with respect to each class of
shares offered by the Fund. The Distribution Plan is designed to promote sales,
thereby increasing the net assets of the Fund. Such an increase may reduce the
Fund's expense ratio to the extent 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 Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
Service Fees: With respect to Class A Shares, no service fees will be paid:
(i) to any dealer who is the holder or dealer of record for investors who own
Class A shares having an aggregate net asset value less than $750,000, or such
other amount as may be determined from time to time by MFD (MFD, however, may
waive this minimum amount requirement from time to time); or (ii) to any
insurance company which has entered into an agreement with the Fund and MFD
that permits such insurance company to purchase Class A shares from the Fund at
their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from
time to time be required to meet certain other criteria in order to receive
service fees.
With respect to Class B Shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable
under the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
Distribution Fees: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
General: The Distribution Plan will remain in effect until ,
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of the
Fund's shares (as defined in "Investment Restrictions"). All agreements
relating to the Distributions Plan entered into between the Fund or MFD and
other organizations must be approved by the Board of Trustees, including a
majority of the Distribution Plan Qualified Trustees. Agreements under the
Distribution Plan must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment of any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of the Fund's shares. The
Distribution Plan may not be amended to increase materially the amount of
permitted distribution expenses without the approval of a majority of the
respective class of the Fund's shares (as defined in "Investment Restrictions")
or may not be materially amended in any case without a vote of the Trustees and
a majority of the Distribution Plan Qualified Trustees. The selection and
nomination of Distribution Plan Qualified Trustees shall be committed to the
discretion of the non-interested Trustees then in office. No Trustee who is not
an "interested person" has any financial interest in the Distribution Plan or
in any related agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE Net Asset Value: The net
asset value per share of each class of the Fund is determined each day during
which the Exchange is open for trading. (As of the date of this SAI, the
Exchange is open for trading every weekday except for the following holidays (or
the days on which they are observed): New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once each day as
of the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding. Equity securities in the Fund's portfolio are valued at the last
sale price on the exchange on which they are primarily traded or on the NASDAQ
system for unlisted national market issues, or at the last quoted bid price for
listed securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system. Bonds and other fixed income
securities (other than short-term obligations) of U.S. issuers in the Fund's
portfolio are valued on the basis of valuations furnished by a pricing service
which utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Forward Contracts will be valued
using a pricing model taking into consideration market data from an external
pricing
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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. Short-term obligations in
the Fund's portfolio are valued at amortized cost, which constitutes fair value
as determined by the Board of Trustees. Short-term obligations with a remaining
maturity in excess of 60 days will be valued upon dealer supplied valuations.
Portfolio investments for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD in its
capacity as the Fund's distributor, or its agent, the shareholder servicing
agent, prior to the close of that business day.
Performance Information
Total Rate of Return: The Fund will calculate its total rate of return for
each class of shares for certain periods by determining the average annual
compounded rates of return over those periods that would cause an investment of
$1,000 (made with all distributions reinvested and reflecting the CDSC or the
maximum public offering price) to reach the value of that investment at the end
of the periods. The Fund may also calculate (i) a total rate of return, which
is not reduced by the CDSC (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 (4.75% maximum for
Class A shares) and/or (iii) total rates of return which represent aggregate
performance over a period or year-by-year performance, and which may or may not
reflect the effect of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which may be initially offered for
sale to, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable
to Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would
have been quoted had the newer class of shares been outstanding for the entire
period over which the calculation is based if the class specific expenses for
the newer class are higher than the class specific expenses of the oldest
class, and the total rate of return quoted for the newer class will be lower
than the return that would be quoted had the newer class of shares been
outstanding for this entire period if the class specific expenses for the newer
class are lower than the class specific expenses of the oldest class).
Performance Results: The performance results, as well as any yield or total
rate of return quotation provided by the Fund, should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate yields and total rates of return should be
considered when comparing the yield and total rate of return of the Fund to
yields and total rates of return published for other investment companies or
other investment vehicles. Total rate of return reflects the performance of
both principal and income. Current net asset value of shares and account
balance information may be obtained by calling 1-800-MFS-TALK (637-8255).
Yield: Any yield quotation for a class of shares of the Fund will be based on
the annualized net investment income per share of that class over a 30-day
period. The yield is calculated by dividing the net investment income per share
allocated to a particular class of the Fund earned during the period by the
maximum offering price per share of such class on the last day of that period.
The resulting figure is then annualized. Net investment income per share of a
class is determined by dividing (i) the dividends
24
<PAGE>
and interest earned by the Fund allocated to the class during the period, minus
accrued expenses of such class for the period, by (ii) the average number of
shares of such class entitled to receive dividends during the period multiplied
by the maximum offering price per share of such class on the last day of the
period. The Fund's yield calculations assume a maximum sales charge of 4.75% in
the case of Class A shares and no payment of any CDSC in the case of Class B and
Class C shares.
Current Distribution Rate: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends paid during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B and Class C shares assumes no CDSC is paid.
General: From time to time the Fund may, as appropriate, quote Fund rankings
or reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions
and Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street,
Standard and Poor's, Individual Investor, The 100 Best Mutual Funds You Can
Buy, by Gordon K. Williamson, Consumer Price Index, and Sanford C. Bernstein &
Co. Fund performance may also be compared to the performance of other mutual
funds tracked by financial or business publications or periodicals. The Fund
may also quote evaluations mentioned in independent radio or television
broadcasts and use charts and graphs to illustrate the past performance of
various indices such as those mentioned above and illustrations using
hypothetical rates of return to illustrate the effects of compounding and
tax-deferral. The Fund may advertise examples of the effects of periodic
investment plans, including the principle of dollar cost averaging. In such a
program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or guard
against a loss in a declining market, the investor's average cost per share can
be lower than if fixed numbers of shares are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar related matters.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views may
include information regarding: retirement planning; tax management strategies;
estate planning; general investment techniques (e.g., asset allocation and
disciplined saving and investing); business succession; ideas and information
provided through the MFS Heritage Planningsm program, an inter-generational
financial planning assistance program; issues with respect to insurance (e.g.,
disability and life insurance and Medicare supplemental insurance); issues
regarding financial and health care management for elderly family members; and
other similar or related matters.
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.
- -- 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[RegTM] 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[RegTM] World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
- -- 1984 -- MFS[RegTM] Municipal High Income Fund is the first open-
end mutual fund to seek high tax-free income from lower-rated
municipal securities.
25
<PAGE>
- -- 1986 -- MFS[RegTM] Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for
shareholders.
- -- 1986 -- MFS[RegTM] Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
- -- 1987 -- MFS[RegTM] Multimarket Income Trust is the first closed-
end, multimarket high income fund listed on the New York Stock
Exchange.
- -- 1989 -- MFS[RegTM] Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
- -- 1990 -- MFS[RegTM] World Total Return Fund is the first global balanced
fund.
- -- 1993 -- MFS[RegTM] 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[RegTM] Union Standard Equity Fund,
the first trust to invest solely in companies deemed to be
union-friendly by an Advisory Board of senior labor
officials, senior managers of companies with significant
labor contracts, academics and other national labor leaders
or experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any
series into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in that series. The Declaration of Trust
further authorizes the Trustees to classify or reclassify any series of shares
into one or more classes. Pursuant thereto, the Trustees have authorized the
issuance of four classes of shares of each series of the Trust, Class A shares,
Class B shares, Class C shares and Class I shares. Each share of a class of the
Fund represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of each
class of the Fund are entitled to share pro rata in the Fund's net assets
allocable to such class available for distribution to shareholders. The Fund
reserves the right to create and issue a number of series and additional
classes of shares, in which case the shares of each class of a series would
participate equally in the earnings, dividends and assets allocable to that
class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
the Declaration of Trust provides that a Trustee may be removed from office at
a meeting of shareholders by a vote of two-thirds of the outstanding shares of
the Fund. A meeting of shareholders will be called upon the request of
shareholders of record holding in the aggregate not less than 10% of the
outstanding voting securities of the Fund. No material amendment may be made to
the Trust's Declaration of Trust without the affirmative vote of a majority of
the Fund's outstanding shares (as defined in "Investment Restrictions"). The
Fund may be terminated (i) upon the merger or consolidation of the Fund with
another organization or upon the sale of all or substantially all of its
assets, if approved by the vote of the holders of two-thirds of the Fund's
outstanding shares, except that if the Trustees recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Fund's outstanding shares will be sufficient, or (ii) upon liquidation and
distribution of the assets of the Fund, if approved by the vote of the holders
of two-thirds of its outstanding shares of the Fund, or (iii) by the Trustees
by written notice to its shareholders. If not so terminated, the Fund 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 Fund and provides for
indemnification and reimbursement of expenses out of Fund property for any
shareholder held personally liable for the obligations of the Fund. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Fund and its shareholders and the Trustees, officers,
employees and agents of the Fund covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Fund itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL
STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to the
preparation of filings with the SEC.
26
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
Custodian and Dividend
Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS[RegTM] Charter
Income Fund
500 Boylston Street
Boston, MA 02116
[MFS LOGO]
INVESTMENT MANAGEMENT
We invented the mutual fund[SM]
MSI-13-3/98/500
<PAGE>
PART C
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements Included in Part A:
None
Financial Statements Included in Part B:
None
(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. (8)
(c) Amendment to Declaration of Trust, dated
June 12, 1996. (9)
(d) Amendment to Declaration of Trust, dated
December 19, 1996. (10)
(e) Amendment to Declaration of Trust, to redesignate
name of MFS Capital Growth Fund to MFS Large Cap
Growth Fund. (16)
(f) Amendment to Declaration of Trust - Designation of
New Series; to be provided.
2 Amended and Restated By-Laws, dated
December 14, 1994. (3)
3 Not Applicable.
4 Form of Share Certificate for Classes of
Shares. (7)
5 (a) Investment Advisory Agreement for MFS Emerging
Growth Fund, dated August 1, 1993 as amended
through August 9, 1995. (8)
(b) Investment Advisory Agreement for MFS Capital Growth
Fund, dated September 1, 1993. (3)
<PAGE>
(c) Investment Advisory Agreement for MFS Intermediate
Income Fund, dated September 1, 1993. (3)
(d) Investment Advisory Agreement for MFS Charter
Income Fund; to be provided.
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 and the Mutual Fund
Agreement between MFD and a bank or NASD
affiliate, as amended on April 11, 1997. (13)
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 January 1, 1998, to amend fee
schedule. (18)
(c) Exchange Privilege Agreement, dated
July 30, 1997. (11)
(d) 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)
(e) Third Amendment dated February 14, 1997 to Loan
Agreement dated February 21, 1995 by and among
the Banks named therein and The First National
Bank of Boston. (14)
<PAGE>
(f) Master Administrative Services Agreement dated
March 1, 1998. (12)
(g) Dividend Disbursing Agent Agreement, dated
February 1, 1986. (4)
10 Consent and Opinion of Counsel dated
January 26, 1998. (16)
11 Consent of Deloitte & Touche LLP with respect to
financial statements for fiscal year ended
November 30, 1997. (18)
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)
(d) Forms for Roth Individual Retirement Account
Disclosure Statement and Trust Agreement as
currently in effect. (17)
15 (a) Master Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940,
effective January 1, 1997. (15)
(b) Exhibits as revised to Master Distribution Plan
pursuant to Rule 12b-1 under the Investment Company
Act of 1940, to replace those exhibits to the
Master Distribution Plan contained in Exhibit 15(a)
above; to be provided.
(c) Exhibits as revised February 11, 1998 to Master
Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 to replace those
exhibits to the Master Distribution Plan contained
in Exhibit 15(a) above. (11)
16 Schedule for Computation of Performance
Quotations - Average Annual Total Rate of
Return, Aggregate Total Rate of Return and
Standardized Yield. (1)
<PAGE>
17 Financial Data Schedules for each class of each
Series of the Trust. (18)
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940. (7)
Power of Attorney, dated August 11, 1994. (3)
Power of Attorney, dated February 19, 1998. (18)
- -----------------------------
(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via EDGAR
on February 22, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 8 on Form N-2 for
MFS Municipal Income Trust (File No. 811-4841) filed with the SEC via EDGAR
on February 28, 1995.
(3) Incorporated by reference to 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 I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 25 filed with the SEC via EDGAR on
August 27, 1996.
(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 18
filed with the SEC via EDGAR on March 28, 1996.
(9) Incorporated by reference to Registrant's Post-Effective Amendment No. 19
filed with the SEC via EDGAR on August 27, 1996.
(10) Incorporated by reference to Registrant's Post-Effective Amendment No. 20
filed with the SEC via EDGAR on January 27, 1997.
(11) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 30 filed with the SEC via EDGAR on
March 11, 1998.
(12) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 65 filed with
the SEC via EDGAR on March 30, 1997.
(13) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.
(14) Incorporated by reference to MFS Series Trust I (File No. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.
(15) Incorporated by reference to MFS Government Limited Maturity Fund (File
Nos. 2-96738 and 811-4253) Post-Effective Amendment No. 18 filed with the
SEC via EDGAR on April 29, 1997.
(16) Incorporated by reference to Registrant's Post-Effective Amendment No. 24
filed with the SEC via EDGAR on January 28, 1998.
(17) Incorporated by reference to MFS Series Trust VIII (File Nos. 33-37972 and
811-5262) Post-Effective Amendment No. 14 filed with the SEC via EDGAR on
February 26, 1998.
(18) Incorporated by reference to Registrant's Post-Effective Amendment No. 25
filed with the SEC via EDGAR on March 27, 1998.
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
<PAGE>
Item 26. Number of Holders of Securities
For MFS Emerging Growth Fund
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 232,004
(without par value) (as of February 28, 1998)
Class B Shares of Beneficial Interest 374,766
(without par value) (as of February 28, 1998)
Class C Shares of Beneficial Interest 20,003
(without par value) (as of February 28, 1998)
Class I Shares of Beneficial Interest 13
(without par value) (as of February 28, 1998)
For MFS Large Cap Growth Fund (formerly known as MFS Capital
Growth Fund)
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 18,536
(without par value) (as of February 28, 1998)
Class B Shares of Beneficial Interest 28,657
(without par value) (as of February 28, 1998)
Class I Shares of Beneficial Interest 2
(without par value) (as of February 28, 1998)
For MFS Intermediate Income Fund
(1) (2)
Title of Class Number of Record Holders
Class A Shares of Beneficial Interest 2,981
(without par value) (as of February 28, 1998)
Class B Shares of Beneficial Interest 6,915
(without par value) (as of February 28, 1998)
Class I Shares of Beneficial Interest 3
(without par value) (as of February 28, 1998)
<PAGE>
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 (except the Vertex Funds mentioned below): Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS Growth
Opportunities Fund, MFS Government Securities Fund, MFS Government Limited
Maturity Fund, MFS Series Trust I (which has thirteen series: MFS Managed
Sectors Fund, MFS Cash Reserve Fund, MFS World Asset Allocation Fund, MFS
Strategic Growth Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Convertible
Securities Fund, MFS Blue Chip Fund, MFS New Discovery Fund, MFS Science and
Technology Fund and MFS Research International Fund), MFS Series Trust II (which
has three series: MFS Emerging Growth Fund, MFS Large Cap Growth Fund and MFS
Intermediate Income Fund), MFS Series Trust III (which has two series: MFS High
Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV (which has
four series: MFS Money Market Fund, MFS Government Money Market Fund, MFS
Municipal Bond Fund and MFS Mid Cap Growth Fund), MFS Series Trust V (which has
six series: MFS Total Return Fund, MFS Research Fund, MFS International
Opportunities Fund, MFS International Strategic Growth Fund, MFS International
Value Fund and MFS Asia Pacific Fund), MFS Series Trust VI (which has three
series: MFS World Total Return Fund, MFS Utilities Fund and MFS World Equity
Fund), MFS Series Trust VII (which has two series: MFS World Governments Fund
and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS Strategic
Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has three
series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has eight series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS
International Growth Fund, MFS International Growth and Income Fund, MFS Real
Estate Investment Fund, MFS Strategic Value Fund, MFS Small Cap Value Fund and
MFS Emerging Markets Debt Fund), MFS Series Trust XI (which has six series: MFS
Union Standard Equity Fund, Vertex All Cap Fund, Vertex Research All Cap Fund,
Vertex Growth Fund, Vertex Discovery Fund and Vertex Contrarian Fund (the Vertex
Funds are expected to be declared effective April 28, 1998)), and MFS Municipal
Series Trust (which has 16 series: MFS Alabama Municipal Bond Fund, MFS Arkansas
Municipal Bond
<PAGE>
Fund, MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS
Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the MFS Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following open-end Funds: MFS
Institutional Trust ("MFSIT") (which has seven series) and MFS Variable
Insurance Trust ("MVI") (which has twelve series). The principal business
address of each of the aforementioned funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following closed-end
funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS Government
Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust
and MFS Special Value Trust (the "MFS Closed-End Funds"). The principal business
address of each of the MFS Closed-End Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL") (which has 26 series), Money Market Variable Account, High Yield
Variable Account, Capital Appreciation Variable Account, Government Securities
Variable Account, World Governments Variable Account, Total Return Variable
Account and Managed Sectors Variable Account (collectively, the "Accounts"). The
principal business address of MFS/SL is 500 Boylston Street, Boston,
Massachusetts 02116. The principal business address of each of the
aforementioned Accounts is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
Vertex Investment Management, Inc., a Delaware corporation and a wholly
owned subsidiary of MFS, whose principal business address is 500 Boylston
Street, Boston, Massachusetts 02116 ("Vertex"), serves as investment adviser to
Vertex All Cap Fund, Vertex Research All Cap Fund, Vertex Growth Fund, Vertex
Discovery Fund and Vertex Contrarian Fund, each a series of MFS Series Trust XI.
The principal business address of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
MFS International Ltd. ("MIL"), a limited liability company organized under
the laws of Bermuda and a subsidiary of MFS, whose principal business address is
Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves as investment
adviser to and distributor for MFS American Funds (which has six portfolios: MFS
American Funds-U.S. Equity Fund, MFS American Funds-U.S. Emerging Growth Fund,
MFS American Funds-U.S. High Yield Bond Fund, MFS American Funds - U.S. Dollar
Reserve Fund, MFS American Funds-Charter Income Fund and MFS American Funds-U.S.
Research Fund) (the "MIL Funds"). The MIL Funds are organized in Luxembourg and
qualify as an undertaking for collective investments in transferable securities
(UCITS).
<PAGE>
The principal business address of the MIL Funds is 47, Boulevard Royal, L-2449
Luxembourg.
MIL also serves as investment adviser to and distributor for MFS Meridian
U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian Global
Governments Fund, MFS Meridian U.S. Emerging Growth Fund, MFS Meridian Global
Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian World Growth Fund,
MFS Meridian Money Market Fund, MFS Meridian World Total Return Fund, MFS
Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS Meridian U.S. High
Yield Fund and MFS Meridian Emerging Markets Debt Fund (collectively the "MFS
Meridian Funds"). Each of the MFS Meridian Funds is organized as an exempt
company under the laws of the Cayman Islands. The principal business address of
each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman Islands,
British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Institutional Advisors (Australia) Ltd. ("MFSI-Australia"), a private
limited company organized under the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, N5W2000, Australia, is involved primarily in investment
management and distribution of Australian superannuation unit trusts and acts as
an investment adviser to institutional accounts.
MFS Holdings Australia Pty Ltd. ("MFS Holdings Australia"), a private
limited company organized pursuant to the Corporations Law of New South Wales,
Australia whose current address is Level 37, Governor Phillip Tower, One Farrer
Place, Sydney, NSW2000 Australia, and whose function is to serve primarily as a
holding company.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI and MFSIT.
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS, serves
as shareholder servicing agent to the MFS Funds, the MFS Closed-End Funds, MFSIT
and MVI.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned subsidiary of
MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of MFS,
markets MFS products to retirement plans and provides administrative and record
keeping services for retirement plans.
<PAGE>
MFS
The Directors of MFS are Jeffrey L. Shames, Arnold D. Scott, John W.
Ballen, Donald A. Stewart and John D. McNeil. Mr. Shames is the Chairman, Chief
Executive Officer and President, Mr. Scott is a Senior Executive Vice President
and Secretary, William W. Scott, Jr., Patricia A. Zlotin, John W. Ballen, Thomas
J. Cashman, Jr., Joseph W. Dello Russo and Kevin R. Parke are Executive Vice
Presidents, Stephen E. Cavan is a Senior Vice President, General Counsel and an
Assistant Secretary, Robert T. Burns is a Senior Vice President, Associate
General Counsel and an Assistant Secretary of MFS, and Thomas B. Hastings is a
Vice President and Treasurer of MFS.
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS Growth Opportunities Fund
MFS Government Securities Fund
MFS Series Trust I
MFS Series Trust V
MFS Series Trust VI
MFS Series Trust X
MFS Government Limited Maturity Fund
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost, Ellen M. Moynihan and Mark E. Bradley, Vice Presidents of MFS, are the
Assistant Treasurers, James R. Bordewick, Jr., Senior Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS Series Trust II
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS Government Markets Income Trust
MFS Intermediate Income Trust
Leslie J. Nanberg, Senior Vice President of MFS, is a Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers, and
James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust III
James T. Swanson, Robert J. Manning and Joan S. Batchelder, Senior Vice
Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W.
<PAGE>
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers, and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS Series Trust IV
MFS Series Trust IX
Robert A. Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS,
are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VII
Leslie J. Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are
Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
MFS Series Trust VIII
Jeffrey L. Shames, Leslie J. Nanberg and James T. Swanson and John D.
Laupheimer, Jr., a Senior Vice President of MFS, are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Municipal Series Trust
Robert A. Dennis is Vice President, David B. Smith and Geoffrey L.
Schechter, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus, Vice
President of MFS, is an Assistant Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS Variable Insurance Trust
MFS Series Trust XI
MFS Institutional Trust
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers and
James R. Bordewick, Jr. is the Assistant Secretary.
<PAGE>
MFS Municipal Income Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS Multimarket Income Trust
MFS Charter Income Trust
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr. is the Assistant Secretary.
MFS Special Value Trust
Robert J. Manning is Vice President, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is the
Assistant Secretary.
MFS/Sun Life Series Trust
John D. McNeil, Chairman and Director of Sun Life Assurance Company of
Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr. is the Assistant Secretary.
Money Market Variable Account
High Yield Variable Account
Capital Appreciation Variable Account
Government Securities Variable Account
Total Return Variable Account
World Governments Variable Account
Managed Sectors Variable Account
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary, and
James R. Bordewick, Jr. is the Assistant Secretary.
Vertex
Jeffrey L. Shames and Arnold D. Scott are the Directors, Jeffrey L. Shames
is the President, Kevin R. Parke and John W. Ballen are Executive Vice
Presidents, John F. Brennan, Jr., and John D. Laupheimer are Senior Vice
Presidents, Brian E. Stack is a Vice President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the
<PAGE>
Assistant Treasurer, Stephen E. Cavan is the Secretary and Robert T. Burns is
the Assistant Secretary.
MIL
Arnold D. Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
Directors, Stephen E. Cavan is a Director, Senior Vice President and the Clerk,
Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo, Executive Vice
President and Chief Financial Officer of MFS, is the Treasurer and Thomas B.
Hastings is the Assistant Treasurer.
MIL-UK
Thomas J. Cashman, Jr. is President and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Stephen E. Cavan is a Director and the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Assistant Secretary.
MFSI - Australia
Thomas J. Cashman, Jr. is President and a Director, Graham E. Lenzer, John
A. Gee and David Adiseshan are Directors, Stephen E. Cavan is the Secretary,
Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the Assistant
Treasurer, and Robert T. Burns is the Assistant Secretary.
MFS Holdings - Australia
Jeffrey L. Shames is the President and a Director, Arnold D. Scott, Thomas
J. Cashman, Jr., and Graham E. Lenzer are Directors, Stephen E. Cavan is the
Secretary, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr. is
the Assistant Secretary.
MFS Meridian Funds
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr. is the
Assistant Secretary and James O. Yost, Ellen M. Moynihan and Mark E. Bradley are
the Assistant Treasurers.
<PAGE>
MFD
Arnold D. Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr.,
an Executive Vice President of MFS, is the President, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is
the Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
MFSC
Arnold D. Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes,
a Senior Vice President and Chief Information Officer of MFS, is Vice Chairman
and a Director, Janet A. Clifford is the President, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary, and Robert T. Burns is the Assistant Secretary.
MFSI
Jeffrey L. Shames, and Arnold D. Scott are Directors, Thomas J. Cashman,
Jr., is the President and a Director, Leslie J. Nanberg is a Senior Vice
President, a Managing Director and a Director, Kevin R. Parke is the Executive
Vice President and a Managing Director, George F. Bennett, Jr., John A. Gee,
Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are Senior Vice
Presidents and Managing Directors, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is the
Secretary.
RSI
Arnold D. Scott is the Chairman and a Director, Martin E. Beaulieu is the
President, William W. Scott, Jr. is a Director, Joseph W. Dello Russo is the
Treasurer, Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is
the Secretary and Robert T. Burns is the Assistant Secretary.
In addition, the following persons, Directors or officers of MFS, have the
affiliations indicated:
Donald A. Stewart President and a Director, Sun
Life Assurance Company of Canada, Sun Life
Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. Stewart is also an
officer and/or Director of various
subsidiaries and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of
Canada, Sun Life Centre, 150 King Street
West, Toronto, Ontario, Canada (Mr. McNeil
is also an officer and/or Director of
<PAGE>
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.
<PAGE>
(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 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 15th day of April, 1998.
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 April 15, 1998.
SIGNATURE TITLE
STEPHEN E. CAVAN* Principal Executive Officer
- ----------------
Stephen E. Cavan
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
<PAGE>
ABBY M. O'NEILL* Trustee
- ---------------
Abby M. O'Neill
WALTER E. ROBB, III* Trustee
- -------------------
Walter E. Robb, III
ARNOLD D. SCOTT* Trustee
- ---------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- -----------------
Jeffrey L. Shames
J. DALE SHERRATT* Trustee
- ----------------
J. Dale Sherratt
WARD SMITH* Trustee
- ----------
Ward Smith
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick,
Jr. on behalf of those indicated
pursuant to (i) a Power of
Attorney dated August 11, 1994,
incorporated by reference to the
Registrant's Post- Effective
Amendment No. 16 filed with the
Securities and Exchange Commission
via EDGAR on March 30, 1995 and
(ii) a Power of Attorney dated
February 19, 1998, filed herewith.
