<PAGE>
As filed with the Securities and Exchange Commission on March 27, 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. 25
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 27
MFS SERIES TRUST II
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on March 30, 1998 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
<PAGE>
MFS SERIES TRUST II
MFS EMERGING GROWTH FUND
MFS LARGE CAP GROWTH FUND
MFS INTERMEDIATE INCOME FUND
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement
of Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART A PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
<S> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of the Fund - Performance
Information
(d) Condensed Financial Information *
4 (a) Front Cover Page; the Fund; *
Investment Objective and Policies
(b), (c) Investment Objective and Policies *
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; Management *
of the Fund - Investment Adviser;
Back Cover Page
(c) Management of the Fund - *
Investment Adviser
(d) Management of the Fund - *
Investment Adviser;
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
(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
(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 * *
<PAGE>
<CAPTION>
ITEM NUMBER STATEMENT OF
FORM N-1A, PART B PROSPECTUS CAPTION ADDITIONAL INFORMATION
- ----------------- ------------------ ----------------------
<S> <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) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a), (b), (c) * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares 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
(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
23 * Independent Auditors and
Financial Statements
</TABLE>
- ---------------------
* Not Applicable
** Contained in Annual Report
<PAGE>
MFS EMERGING GROWTH FUND
SUPPLEMENT TO THE APRIL 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 APRIL 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
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.................................................... 0.71%
Rule 12b-1 Fees.................................................... None
Other Expenses(1).................................................. 0.26%
-----
Total Operating Expenses........................................... 0.97%
- ----------
(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."
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........................................ $10
3 years....................................... 31
5 years....................................... 54
10 years...................................... 119
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.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
Shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Deloitte
& Touche LLP.
FINANCIAL HIGHLIGHTS - CLASS I SHARES
PERIOD ENDED
NOVEMBER 30,1997*
Per share data (for a share outstanding throughout
the period):
Net asset value - beginning of period $ 29.98
--------
Income from investment operations # -
Net investment loss $ (0.23)
Net realized and unrealized gain
on investments 7.87
--------
Total from investment operations $ 7.64
-------
Net asset value - end of period $ 37.62
-------
Total return 25.48%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.97%+
Net investment loss (0.74)%+
Portfolio turnover 21%
Average Commission Rate $0.0521
Net assets, end of period
(000,000 omitted) $ 47
- --------------------------
* For the period from the inception of Class I shares, January 2, 1997
through November 30, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
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 5.75% 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 shares and Class I shares do
not convert to any other class of shares of the Fund.
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.
THE DATE OF THIS SUPPLEMENT IS APRIL 1, 1998
<PAGE>
MFS(R) EMERGING GROWTH FUND
APRIL 1, 1998
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
This Prospectus pertains to MFS Emerging Growth Fund (the "Fund"), a
diversified series of MFS Series Trust II (the "Trust"), an open-end
management investment company consisting of three series. The Fund's
investment objective is to provide long-term growth of capital by investing
primarily in common stocks of companies that MFS believes are early in their
life cycle but which have the potential to become major enterprises (emerging
growth companies). THE FUND IS INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE
WILLING TO ACCEPT THE RISKS ENTAILED IN SEEKING LONG-TERM GROWTH OF CAPITAL
(see "Investment Objective and Policies"). The minimum initial investment
generally is $1,000 per account (see "Information Concerning Shares of the
Fund -- Purchases"). The Fund's investment adviser and distributor are
Massachusetts Financial Services Company ("MFS" or the "Adviser") and MFS Fund
Distributors, Inc. ("MFD"), respectively, both of which are located at 500
Boylston Street, Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
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>
This Prospectus sets forth concisely the information concerning the Trust and
Fund that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information dated April 1, 1998, as amended or
supplemented from time to time, (the "SAI"), which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 41 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
Page
1. Expense Summary ..................................... 3
2. Condensed Financial Information ..................... 5
3. The Fund ............................................ 9
4. Investment Objective and Policies ................... 9
5. Certain Securities and Investment Techniques ........ 10
6. Additional Risk Factors ............................. 16
7. Management of the Fund .............................. 20
8. Information Concerning Shares of the Fund ........... 22
Purchases ........................................ 22
Exchanges ........................................ 29
Redemptions and Repurchases ...................... 31
Distribution Plan ................................ 34
Distributions .................................... 36
Tax Status ....................................... 36
Net Asset Value .................................. 37
Description of Shares, Voting Rights and
Liabilities ............................................ 37
Performance Information .......................... 38
9. Shareholder Services ................................ 39
Appendix A .......................................... A-1
Appendix B .......................................... B-1
<PAGE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a
percentage of offering price) ......... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase
price or redemption proceeds, as
applicable) ........................... See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ......................... 0.71% 0.71% 0.71%
Rule 12b-1 Fees ......................... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses(4) ....................... 0.26% 0.26% 0.26%
---- ---- ----
Total Operating Expenses ................ 1.22% 1.97% 1.97%
- ----------
(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 (a "CDSC") of 1% will be imposed on such purchases
in the event of certain redemption transactions within 12 months
following such purchases (see "Information Concerning Shares of the Fund
-- Purchases" below).
(2) The Fund has adopted a distribution plan for its 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 the average daily net assets attributable to the
Class A shares. Payment of the 0.10% per annum Class A distribution fee
will commence on such date as the Trustees of the Trust may determine.
Assets attributable to Class A shares sold prior to March 1, 1991 are
subject to a service fee of 0.15% per annum. Distribution expenses paid
under this Plan, together with the initial sales charge, may cause long-
term shareholders to pay more than the maximum sales charge that would
have been permissible if imposed entirely as an initial sales charge
(see "Information Concerning Shares of the Fund -- Distribution Plan"
below).
(3) The Fund's Distribution Plan provides that it will pay distribution/
service fees aggregating up to 1.00% per annum of the average net assets
attributable to Class B shares and Class C shares, respectively.
Distribution expenses paid under the Distribution Plan with respect to
Class B or Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term
shareholders to pay more than the maximum sales charge that would have
been permissible if imposed entirely as an initial sales charge (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."
<PAGE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming }a{ 5% annual return and }b{ redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B CLASS C
- ------ ------- --------------- ---------------
(1)
1 year .............. $ 69 $ 60 $ 20 $ 30 $ 20(1)
3 years ............. 94 92 62 62 62
5 years ............. 121 126 106 106 106
10 years ............. 197 210 210(2) 230 230
- ----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear
directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: }i{ varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e.,
distribution plan) fees -- "Distribution 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.
<PAGE>
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the
Fund's independent auditors given upon their authority, as experts in
accounting and auditing. The Fund's current independent auditors are Deloitte
& Touche LLP.
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993*
------ ------ ------ ------ ------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .................. $32.01 $26.79 $18.73 $17.68 $16.43
------ ------ ------ ------ ------
Income from investment operations# --
Net investment loss ................................... $(0.34) $(0.29) $(0.23) $(0.20) $(0.03)
Net realized and unrealized gain on investments and
foreign currency transactions ....................... 6.24 5.51 8.68 1.78 1.28
------ ------ ------ ------ ------
Total from investment operations .................. $ 5.90 $ 5.22 $ 8.45 $ 1.58 $ 1.25
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net realized gain on investments and foreign
currency transactions ............................... $(0.37) $ -- $(0.38) $(0.53) $ --
In excess of net realized gain on investments and
foreign currency transactions ....................... -- -- -- *** -- --
From paid-in capital .................................. -- -- (0.01) -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.37) $ -- $(0.39) $(0.53) $ --
------ ------ ------ ------ ------
Net asset value -- end of period ........................ $37.54 $32.01 $26.79 $18.73 $17.68
====== ====== ====== ====== ======
Total return+ ........................................... 18.66% 19.52% 45.98% 9.06% 38.98%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............................................ 1.21% 1.20% 1.28% 1.33% 1.19%+
Net investment loss ................................... (0.99)% (1.01)% (1.04)% (1.09)% (0.98)%+
PORTFOLIO TURNOVER ...................................... 21% 22% 20% 39% 58%
AVERAGE COMMISSION RATE### .............................. $0.0521 $0.0498 $ -- $ -- $ --
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ........... $ 3,875 $ 2,524 $1,312 $ 470 $ 371
- ----------
+Annualized.
*For the period from the inception of Class A shares, September 13, 1993 through November 30, 1993.
***The per share distribution in excess of net realized gain on investments was $0.0049.
#Per share data for the periods subsequent to December 1, 1993 are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results would
have been lower.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
CLASS B SHARES
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .................. $31.48 $26.56 $18.57 $17.64 $14.93
------ ------ ------ ------ ------
Income from investment operations# --
Net investment loss ................................... $(0.59) $(0.52) $(0.41) $(0.35) $(0.33)
Net realized and unrealized gain on investments and
foreign currency transactions ....................... 6.14 5.44 8.65 1.78 3.19
------ ------ ------ ------ ------
Total from investment operations .................. $ 5.55 $ 4.92 $ 8.24 $ 1.43 $ 2.86
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net realized gain on investments and foreign
currency transactions ............................... $(0.18) $ -- $(0.24) $(0.50) $(0.15)
In excess of net realized gain on investments and
foreign currency transactions ....................... -- -- -- *** -- --
From paid-in capital .................................. -- -- (0.01) -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.18) $ -- $(0.25) $(0.50) $(0.15)
------ ------ ------ ------ ------
Net asset value -- end of period ........................ $36.85 $31.48 $26.56 $18.57 $17.64
====== ====== ====== ====== ======
Total return ............................................ 17.78% 18.52% 44.89% 8.21% 19.36%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ............................................ 1.97% 2.00% 2.08% 2.14% 2.19%
Net investment loss ................................... (1.75)% (1.80)% (1.83)% (1.90)% (1.61)%
PORTFOLIO TURNOVER ...................................... 21% 22% 20% 39% 58%
AVERAGE COMMISSION RATE### .............................. $0.0521 $0.0498 $ -- $ -- $ --
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ........... $ 5,144 $ 3,659 $2,001 $ 769 $ 602
- ----------
***The per share distribution in excess of net realized gain on investments was $0.0031.
#Per share data for the periods subsequent to December 1, 1993 are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
###Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
CLASS B SHARES
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------
1992 1991 1990 1989 1988
------ ------ ------ ------ ------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ...................... $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97
------ ------ ------ ------ ------
Income from investment operations --
Net investment loss ....................................... $(0.07) $(0.13) $(0.14) $(0.13) $(0.11)
Net realized and unrealized gain on investments and foreign
currency transactions ................................... 3.52 5.31 (0.66) 1.91 1.05
------ ------ ------ ------ ------
Total from investment operations ...................... $ 3.45 $ 5.18 $(0.80) $ 1.78 $ 0.94
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net realized gain on investments and foreign currency
transactions ............................................ $(0.59) $ -- $ -- $ -- $ --
------ ------ ------ ------ ------
Total distributions declared to shareholders .......... $(0.59) $ -- $ -- $ -- $ --
------ ------ ------ ------ ------
Net asset value -- end of period ............................ $14.93 $12.07 $ 6.89 $ 7.69 $ 5.91
====== ====== ====== ====== ======
Total return ................................................ 29.25% 75.18% 10.40% 30.12% 18.91%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses .................................................. 2.33% 2.50% 2.75% 2.81% 2.30%
Net investment loss ....................................... (2.00)% (1.98)% (1.86)% (1.91)% (1.65)%
PORTFOLIO TURNOVER .......................................... 59% 112% 86% 95% 57%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ............... $ 357 $ 145 $ 73 $ 82 $ 61
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS -- CONTINUED
CLASS C SHARES
<CAPTION>
YEAR ENDED
NOVEMBER 30,
----------------
1997 1996 ***
------ ------
Class C
- ----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period .............................. $31.48 $28.37
------ ------
Income from investment operations# --
Net investment loss ............................................... $(0.59) $(0.38)
Net realized and unrealized gain on investments and foreign
currency transactions ........................................... 6.12 3.49
------ ------
Total from investment operations .............................. $ 5.53 $ 3.11
------ ------
Less distributions declared to shareholders --
From net realized gain on investments and foreign currency
transactions .................................................... $(0.35) $ --
------ ------
Net asset value -- end of period .................................... $36.66 $31.48
====== ======
Total return ........................................................ 17.81% 10.96%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ........................................................ 1.97% 1.35%+
Net investment loss ............................................... (1.75)% (1.25)%+
PORTFOLIO TURNOVER .................................................. 21% 22%
AVERAGE COMMISSION RATE ............................................. $0.0521 $0.0498
NET ASSETS AT END OF PERIOD (000,000 OMITTED) ....................... $ 344 $ 119
- ----------
***For the period from the inception of Class C shares, April 1, 1996, through November 30,
1996.
+Annualized.
++Not annualized.
#Per share data for the periods subsequent to December 1, 1993 are based on average shares
outstanding.
##The Fund's expenses are calculated without reduction for fees paid indirectly.
</TABLE>
<PAGE>
3. THE FUND
The Fund is a diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of
The Commonwealth of Massachusetts on July 30, 1986. The Trust presently
consists of three series of shares, each of which represents a portfolio with
separate investment objectives and policies. Shares of the Fund are
continuously sold to the public and the Fund then uses the proceeds to buy
securities for its portfolio. Three classes of shares of the Fund currently
are offered 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 5.75% of the
offering price (or a CDSC upon redemption of 1.00% during the first year in
the case of certain purchases of $1 million or more and certain purchases by
retirement plans) and are subject to an annual distribution fee and service
fee up to a maximum of 0.35% per annum. Class B shares are offered at net
asset value without an initial sales charge but are subject to a CDSC upon
redemption (declining from 4.00% during the first year to 0% after six years)
and an annual distribution fee and a service fee up to a maximum of 1.00% per
annum; Class B shares will convert to Class A shares approximately eight years
after purchase. Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year and an annual distribution fee and service fee up to a maximum
of 1.00% per annum. Class C shares do not convert to any other class of shares
of the Fund. 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. The Adviser is responsible for the management of the Fund's assets
and the officers of the Trust are responsible for the Fund's operations. The
Adviser manages the portfolio from day to day in accordance with the Fund's
investment objective and policies. A majority of the Trustees are not
affiliated with the Adviser. The selection of investments and the way they are
managed depend on the conditions and trends in the economies of the various
countries of the world, their financial markets and the relationship of their
currencies to the U.S. dollar. The Fund also offers to buy back (redeem) its
shares from its shareholders at any time at net asset value, less any
applicable CDSC.
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund seeks to provide long-term growth of capital.
Dividend and interest income from portfolio securities, if any, is incidental
to the Fund's investment objective of long-term growth of capital.
INVESTMENT POLICIES -- The Fund's policy is to invest primarily (i.e., at
least 80% of its assets under normal circumstances) in common stocks of
companies that MFS believes are early in their life cycle but which have the
potential to become major enterprises (emerging growth companies). Such
companies generally would be expected to show earnings growth over time that
is well above the growth rate of the overall economy and the rate of
inflation, and would have the products, technologies, management and market
and other opportunities which are usually necessary to become more widely
recognized as growth companies. Emerging growth companies can be of any size,
and the Fund may invest in larger or more established companies whose rates of
earnings growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment.
The nature of investing in emerging growth companies involves greater risk
than is customarily associated with investments in more established companies.
Emerging growth companies often have limited product lines, markets or
financial resources, and they may be dependent on one-person management. In
addition, there may be less research available on many promising small and
medium sized emerging growth companies, making it more difficult to find and
analyze these companies. The securities of emerging growth companies may have
limited marketability and may be subject to more abrupt or erratic market
movements than securities of larger, more established growth companies or the
market averages in general. Shares of the Fund, therefore, are subject to
greater fluctuation in value than shares of a conservative equity fund or of a
growth fund which invests entirely in proven growth stocks.
While the Fund will invest primarily in common stocks, the Fund may, to a
limited extent, seek appreciation in other types of equity securities such as
foreign or convertible securities and warrants when relative values make such
purchases appear attractive either as individual issues or as types of
securities in certain economic environments (see "Additional Risk Factors --
Lower-Rated Fixed Income Securities" below).
Consistent with its investment objective and policies described above, the
Fund may invest up to 25% (and generally expects to invest between 0% and 10%)
of its total assets in foreign securities. (see "Additional Risk Factors --
Foreign Securities"). The Fund may also invest in emerging market securities
(see "Additional Risk Factors -- Emerging Market Securities" below). The Fund
may hold cash equivalents or other forms of debt securities as a reserve for
future purchases of common stock or to meet liquidity needs.
The portfolio of the Fund is aggressively managed and, therefore, the value of
its shares is subject to greater fluctuation and investments in its shares
involve the assumption of a higher degree of risk than would be the case with
an investment in a conservative equity fund or a growth fund investing
entirely in proven growth equities.
While it is not generally the Fund's policy to invest or trade for short-term
profits, the Fund may dispose of a portfolio security whenever the Adviser is
of the opinion that such security no longer has an appropriate appreciation
potential or when another security appears to offer relatively greater
appreciation potential. Subject to tax requirements, portfolio changes are
made without regard to the length of time a security has been held, or whether
a sale would result in a profit or loss.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following securities transactions and investment techniques,
many of which are described more fully in the SAI. See "Certain Securities and
Investment Techniques" in the SAI.
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference
stocks; securities such as bonds, warrants or rights that are convertible into
stocks; and depository receipts for those securities. These securities may be
listed on securities exchanges, traded in various over-the-counter markets or
have no organized markets.
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities.
Such loans will usually be made only to member banks of the Federal Reserve
System and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would continue to collect the
equivalent of the interest on the securities loaned and would also receive
either interest (through investment of cash collateral) or a fee (if the
collateral is U S. Government securities or a letter of credit).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures which are
intended to minimize risk.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act")
("restricted securities"), including those that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act ("Rule
144A securities"). A determination is made, based upon a continuing review of
the trading markets for the specific Rule 144A security, whether such security
is liquid and thus not subject to the Fund's limitation on investing not more
than 15% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring the liquidity of Rule 144A securities. The Board,
however, retains oversight of the liquidity determinations, focusing on
factors such as valuation, liquidity and availability of information.
Investing in Rule 144A securities could have the effect of decreasing the
level of liquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing Rule 144A securities held
in the Fund's portfolio. Subject to the Fund's 15% limitation on investments
in illiquid investments, the Fund may also invest in restricted securities
that may not be sold under Rule 144A, which presents certain risks. As a
result, the Fund might not be able to sell these securities when the Adviser
wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, the
judgment of the Adviser may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
WHEN-ISSUED SECURITIES: In order to help ensure the availability of suitable
securities for its portfolio, the Fund may purchase securities on a "when-
issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. It is expected that, under normal circumstances, the Fund
will take delivery of such securities. In general, the Fund does not pay for
the securities until received and does not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such bases, the Fund will segregate liquid assets
sufficient to cover its commitments. See the SAI.
INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of unusual
market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of the Fund may be invested in
cash or cash equivalents including, but not limited to, obligations of banks
with assets of $1 billion or more (including certificates of deposit, bankers'
acceptances and repurchase agreements), commercial paper, short-term notes,
obligations issued or guaranteed by the U.S. Government or any of its
agencies, authorities or instrumentalities and related repurchase agreements.
U.S. Government securities also include interests in trusts or other entities
representing interests in obligations that are issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities. See Appendix
B to this Prospectus for a description of U.S. Government obligations and
certain short-term investments.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or
automobile loan receivables, representing the obligations of a number of
different parties. Corporate asset-backed securities present certain risks.
For instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral. See the
SAI for further information on these securities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its
assets in loans and other direct indebtedness. By purchasing a loan, the Fund
acquires some or all of the interest of a bank or other lending institution in
a loan to a corporate borrower. Many such loans are secured, and most impose
restrictive covenants which must be met by the borrower. These loans are made
generally to finance internal growth, mergers, acquisitions, stock
repurchases, leveraged buy-outs and other corporate activities. Such loans may
be in default at the time of purchase. The Fund may also purchase other direct
indebtedness such as trade or other claims against companies, which generally
represent money owed by the company to a supplier of goods and services. These
claims may also be purchased at a time when the company is in default. Certain
of the loans and other direct indebtedness acquired by the Fund may involve
revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness
may make such loans especially vulnerable to adverse changes in economic or
market conditions. Loans and other direct indebtedness may not be in the form
of securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the Fund may
be unable to sell such investments at an opportune time or may have to resell
them at less than fair market value. For a further discussion of loans, other
direct indebtedness and the risks related to transactions therein, see the
SAI.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction
and Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets.
The Adviser determines whether an issuer's principal activities are located in
an emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source
of its revenues and location of its assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually
a bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign
securities such as exchange rates and more limited information about foreign
issuers. (See "Additional Risk Factors -- Foreign Securities" below).
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS: The Fund may enter
into transactions in options, futures and forward contracts on a variety of
instruments and indices, in order to protect against declines in the value of
portfolio securities or increases in the cost of securities or other assets to
be acquired and, subject to applicable law, to increase the Fund's gross
income. The types of instruments to be purchased and sold by the Fund are
described in the SAI, which should be read in conjunction with the following
section. In addition, the SAI contains a further discussion of the nature of
the transactions which may be entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES
- -- The Fund may write (sell) covered call and put options and purchase call
and put options on securities. The Fund will write options on securities for
the purpose of increasing its return on such securities and/or to protect the
value of its portfolio. In particular, where the Fund writes an option which
expires unexercised or is closed out by the Fund at a profit, it will retain
the premium paid for the option which will increase its gross income and will
offset in part the reduced value of the portfolio security underlying the
option, or the increased cost of portfolio securities to be acquired. However,
the writing of options constitute only a partial hedge, up to the amount of
the premium, less any transaction costs. In contrast, if the price of the
underlying security moves adversely to the Fund's position, the option may be
exercised and the Fund will be required to purchase or sell the underlying
security at a disadvantageous price, which may only be partially offset by the
amount of the premium. The Fund may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has
written call options.
The Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. In the
event that the expected market fluctuations occur, the Fund may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the options purchased. The premium paid for a put or call option plus
any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise or liquidation of the option, and, unless the price of the
underlying security changes sufficiently, the option may expire without value
to the Fund.
In certain instances, the Fund may enter into options on Treasury securities
which may be referred to as "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option.
OPTIONS ON STOCK INDICES -- The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. The Fund may write
options on stock indices for the purpose of increasing its gross income and to
protect its portfolio against declines in the value of securities it owns or
increases in the value of securities to be acquired. When the Fund writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Fund will either
close out the option at a profit or allow it to expire unexercised. The Fund
will thereby retain the amount of the premium, less related transaction costs,
which will increase its gross income and offset part of the reduced value of
portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse
price fluctuations, since any such fluctuations will be offset only to the
extent of the premium received by the Fund for the writing of the option, less
related transaction costs. In addition, if the value of an underlying index
moves adversely to the Fund's option position, the option may be exercised,
and the Fund will experience a loss which may only be partially offset by the
amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance.
The Fund's possible loss in either case will be limited to the premium paid
for the option, plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- The Fund may enter into stock index futures contracts.
(Unless otherwise specified, futures contracts on indices are referred to as
"Futures Contracts.") The Fund will utilize Futures Contracts for hedging and
non-hedging purposes, subject to applicable law. Purchases or sales of stock
index futures contracts for hedging purposes are used to attempt to protect
the Fund's current or intended stock investments from broad fluctuations in
stock prices. In the event that an anticipated decrease in the value of
portfolio securities occurs as a result of a general stock market decline, a
general increase in interest rates or a decline in the dollar value of foreign
currencies in which portfolio securities are denominated, the adverse effects
of such changes may be offset, in whole or part, by gains on the sale of
Futures Contracts. Conversely, the increased cost of portfolio securities to
be acquired, caused by a general rise in the stock market, a general decline
in interest rates or a rise in the dollar value of foreign currencies, may be
offset, in whole or part, by gains on Futures Contracts purchased by the Fund.
The Fund will incur brokerage fees when it purchases and sells Futures
Contracts, and it will be required to make and maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS -- The Fund may purchase and write options on
stock index futures contracts. (Unless otherwise specified, options on stock
index futures contracts are referred to as "Options on Futures Contracts.")
Such investment strategies will be used for hedging and non-hedging purposes,
subject to applicable law. Put and call Options on Futures Contracts may be
traded by the Fund in order to protect against declines in the values of
portfolio securities or against increases in the cost of securities to be
acquired. Purchases of Options on Futures Contracts may present less risk in
hedging the portfolios of the Fund than the purchase or sale of the underlying
Futures Contracts since the potential loss is limited to the amount of the
premium plus related transaction costs. The writing of such options, however,
does not present less risk than the trading of Futures Contracts and will
constitute only a partial hedge, up to the amount of the premium received. In
addition, if an option is exercised, the Fund may suffer a loss on the
transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY -- The Fund may enter into contracts for
the purchase or sale of a specific currency at a future date at a price set at
the time of the contract (a "Forward Contract"). The Fund will enter into
Forward Contracts for hedging and non-hedging purposes, including transactions
entered into for the purpose of profiting from anticipated changes in foreign
currency exchange rates. Transactions in Forward Contracts entered into for
hedging purposes may include forward purchases or sales of foreign currencies
for the purpose of protecting the dollar value of securities denominated in a
foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. The Fund may also enter into Forward Contracts
for "cross hedging" purposes, e.g., the purchase or sale of a Forward Contract
on one type of currency as a hedge against adverse fluctuations in the value
of a second type of currency. By entering into such transactions, however, the
Fund may be required to forgo the benefits of advantageous changes in exchange
rates. The Fund may also enter into transactions in Forward Contracts for
other than hedging purposes. For example, if the Adviser believes that the
value of a particular foreign currency will increase or decrease relative to
the value of the U.S. dollar, the Fund may purchase or sell such currency,
respectively, through a Forward Contract. If the expected changes in the value
of the currency occur, the Fund will realize profits which will increase its
gross income. Such transactions, however, may be considered speculative and
could involve significant risk of loss, as set forth below. The Fund has
established procedures, which requires use of segregated assets or "cover" in
connection with the purchase and sale of such Contracts.
Forward Contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves
certain risks beyond those associated with transactions in the Futures and
Options contracts described above.
OPTIONS ON FOREIGN CURRENCIES -- The Fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines
in the dollar value of portfolio securities, and against increases in the
dollar cost of securities to be acquired. As in the case of other types of
options, however, the writing of an option on foreign currency will constitute
only a partial hedge, up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the Fund's position,
it may forfeit the entire amount of the premium plus related transaction
costs. As in the case of Forward Contracts, certain options on foreign
currencies are traded over-the-counter and involve risks which may not be
present in the case of exchange-traded instruments.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Certain Securities and Investment Techniques" in the
SAI.
FIXED INCOME SECURITIES: The net asset value of the shares of an open-end
investment company which may invest to a limited extent in fixed income
securities changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected
to rise. Conversely, when interest rates rise, the value of a fixed income
portfolio can be expected to decline.
LOWER-RATED FIXED INCOME SECURITIES -- The Fund may invest no more than 5% of
its assets in lower-rated fixed income securities or comparable unrated
securities. Investments in lower-rated fixed income securities, while
generally providing greater income and opportunity for gain than investments
in higher rated securities, usually entail greater risk of principal and
income (including the possibility of default or bankruptcy of the issuers of
such securities), and involve greater volatility of price (especially during
periods of economic uncertainty or change) than investments in higher rated
securities. Because yields may vary over time, no specified level of income
can ever be assured. In particular, securities rated lower than Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings
Services ("S&P") or by Fitch IBCA ("Fitch") or comparable unrated securities
(commonly known as "junk bonds") are considered speculative. For a description
of these and other rating categories, see Appendix B. These lower-rated high
yielding fixed income securities generally tend to reflect economic changes
(and the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (especially
during times of adverse publicity) to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates (although these lower-rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have under certain circumstances caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on the Fund's lower-rated high yielding fixed
income securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, the Fund may continue to earn the same
level of interest income while its net asset value declines due to portfolio
losses, which could result in an increase in the Fund's yield despite the
actual loss of principal. The prices for these securities may be affected by
legislative and regulatory developments. Changes in the value of securities
subsequent to their acquisition will not affect cash income or yield to
maturity to the Fund but will be reflected in the net asset value of shares of
the Fund. The market for these lower-rated fixed income securities may be less
liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower-rated securities may be affected by
the market's perception of their credit quality. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these
lower-rated securities at their fair value to meet redemption requests or to
respond to changes in the market. No minimum rating standard is required by
the Fund. To the extent the Fund invests in these lower-rated fixed income
securities, the achievement of its investment objective may be more dependent
on the Adviser's own credit analysis than in the case of a fund investing in
higher quality bonds. While the Adviser may refer to ratings issued by
established credit rating agencies, it is not a policy of the Fund to rely
exclusively on ratings issued by these agencies, but rather to supplement such
ratings with the Adviser's own independent and ongoing review of credit
quality.
The Fund may also invest in fixed income securities rated Baa by Moody's or
BBB by S&P and Fitch and comparable unrated securities. These securities,
while normally exhibiting adequate protection parameters, may have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS -- Although the Fund will
enter into certain transactions in Futures Contracts, Options on Futures
Contracts, Forward Contracts and options for hedging purposes, such
transactions do involve certain risks. For example, a lack of correlation
between the index or instrument underlying an option, Futures Contract or
Forward Contract and the assets being hedged, or unexpected adverse price
movements, could render the Fund's hedging strategy unsuccessful and could
result in losses. "Cross hedging" transactions may involve greater correlation
risks. There can be no assurance that a liquid secondary market will exist for
any contract purchased or sold, and the Fund may be required to maintain a
position until exercise or expiration, which could result in losses. As noted,
the Fund may also enter into transactions in such instruments (except for
options on foreign currencies) for other than hedging purposes (subject to
applicable law), including speculative transactions, which involve greater
risk. In entering into such transactions, the Fund may experience losses which
are not offset by gains on other portfolio positions, thereby reducing its
gross income. In addition, the markets for such instruments may be extremely
volatile from time to time, as discussed in the SAI, which could increase the
risks incurred by the Fund in entering into such transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S.
exchanges regulated by the Commodity Futures Trading Commission (the "CFTC")
and on foreign exchanges. The securities underlying options and Futures
Contracts traded by the Fund may include domestic as well as foreign
securities. Investors should recognize that transactions involving foreign
securities or foreign currencies, and transactions entered into in foreign
countries, may involve considerations and risks not typically associated with
investing in U.S. markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk
and could result in losses which are not offset by gains on other portfolio
assets. For example, the Fund may sell Futures Contracts on an index of
securities in order to profit from any anticipated decline in the value of the
securities comprising the underlying index. In such instances, any losses on
the Futures transaction will not be offset by gains on any portfolio
securities comprising such index, as might occur in connection with a hedging
transaction. The risks related to transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts entered into by the Fund
are set forth in greater detail in the SAI, which should be reviewed in
conjunction with the foregoing discussion.
FOREIGN SECURITIES: Investing in securities of foreign issuers generally
involves risks not ordinarily associated with investing in securities of
domestic issuers. These include changes in currency rates, exchange control
regulations, governmental administration or economic or monetary policy (in
the United States or abroad) or circumstances in dealings between nations.
Costs may be incurred in connection with conversions between various
currencies. Special considerations may also include more limited information
about foreign issuers, higher brokerage costs, different accounting standards
and thinner trading markets. Foreign securities markets may also be less
liquid, more volatile and less subject to government supervision than in the
United States. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. The Fund may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of the
Adviser, it would be beneficial to convert such currency into U.S. dollars at
a later date, based on anticipated changes in the relevant exchange rate. The
Fund may also hold foreign currency in anticipation of purchasing foreign
securities. See the SAI for further discussion of foreign securities and the
holding of foreign currency, as well as the associated risk.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may
be intensified in the case of investments in emerging markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund is uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to the Fund due to subsequent declines in value of the
portfolio security, a decrease in the level of liquidity in the Fund's
portfolio, or if the Fund has entered into a contract to sell the security, in
possible liability to the purchaser. Certain markets may require payment for
securities before delivery and in such markets the Fund bears the risk that
the securities will not be delivered and that the Fund's payments will not be
returned. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the
greater uncertainties of investing in less established markets and economies.
In particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions
on foreign ownership, or prohibitions of repatriation of assets, and may have
less protection of property rights than more developed countries. The
economies of countries with emerging markets may be predominantly based on
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to
more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls
may at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of the Fund.
PORTFOLIO TRADING
The Fund intends to manage its portfolio by buying and selling securities to
help attain its investment objective. The Fund will engage in portfolio
trading if it believes a transaction, net of costs (including custodian
charges), will help in attaining its investment objective. (See "Portfolio
Transactions and Brokerage Commissions" in the SAI.)
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the 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 other investment company clients of MFD as
a factor in the selection of broker-dealers to execute the Fund's portfolio
transactions. From time to time, the Adviser may direct certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to pay a
portion of the Fund's operating expenses (e.g., fees charged by the custodian
of the Fund's assets). For a further discussion of portfolio trading, see the
SAI.
--------------------
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). 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.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated August 1, 1993, as amended (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. John W. Ballen, an Executive Vice President of the Adviser,
has been the Fund's portfolio manager since the Fund's inception in 1986. Mr.
Ballen has been employed as a portfolio manager by the Adviser since 1984.
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. Effective July 1, 1995, for its services
and facilities, the Adviser receives a management fee, computed and paid
monthly, in an amount equal to 0.75% of the first $2.5 billion of the Fund's
average daily net assets, 0.70% of the next $4.5 billion of the amount of
average daily net assets, in each case on an annualized basis for its then-
current fiscal year, and, effective July 1, 1997, MFS has voluntarily agreed
to reduce its management fee to 0.65% of the Fund's average daily net assets
in excess of $7 billion, in each case, on an annualized basis for its then-
current fiscal year. This voluntary reduction may be rescinded by MFS only
with the approval of the Fund's Board of Trustees.
For the Fund's fiscal year ended November 30, 1997, the Adviser received
management fees under the Fund's Advisory Agreement of $54,601,569, equivalent
on an annualized basis, to 0.71% of the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Variable Insurance Trust, MFS/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., 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 $77.6 billion on behalf of approximately 2.9 million investor
accounts as of February 28, 1998. As of such date, the MFS organization
managed approximately $52.6 billion of assets invested in equity securities
and approximately $20.4 billion of assets invested in fixed income securities.
Approximately $4.0 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of
U.S. issuers. MFS is a subsidiary of Sun Life of Canada (U.S.) 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,
Chief Executive Officer 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.
W. Thomas London, Stephen E. Cavan, James R. Bordewick, Jr., Leslie J.
Nanberg, James O. Yost, Ellen Moynihan and Mark E. Bradley, 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 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.
Under this Agreement, the Fund pays MFS an administrative fee of 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.
8. 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
PERCENTAGE OF:
------------------------------------ DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- -------- -----------------
<S> <C> <C> <C>
Less than $50,000 .............................. 5.75% 6.10% 5.00%
$50,000 but less than $100,000 ................. 4.75 4.99 4.00
$100,000 but less than $250,000 ................ 4.00 4.17 3.20
$250,000 but less than $500,000 ................ 2.95 3.05 2.25
$500,000 but less than $1,000,000 .............. 2.20 2.25 1.70
$1,000,000 or more ............................. None** None** See Below**
</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.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge).
In the following 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: 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 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 such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares, 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 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:
CONTINGENT
YEAR OF REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
- ------------------ --------------
First ........................................................ 4%
Second ....................................................... 4%
Third ........................................................ 3%
Fourth ....................................................... 3%
Fifth ........................................................ 2%
Sixth ........................................................ 1%
Seventh and following ........................................ 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
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 Fund's 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 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 bears to the shareholder's total Class B shares not acquired
through reinvestment. The conversion of Class B shares to Class A shares is
subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversion will not constitute a
taxable event for federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class B shares would continue to be subject to higher expenses
than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year. Class C shares do not convert to any other class of shares of
the Fund. The maximum investment in Class C shares that may be made is 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 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 by
the Fund 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 (the "Code") if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
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 information 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 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.
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 of Class A shares subject to a CDSC and Units,
the CDSC will carry over to the acquired shares or Units and will be deducted
from the redemption proceeds when such shares or Units are subsequently
redeemed, assuming the CDSC is then payable (the period during which the Class
A shares and the Units were held will be aggregated for purposes of
calculating the applicable CDSC). In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to an initial
sales charge of an MFS Fund, the initial sales charge shall be due upon such
exchange, but will not be imposed with respect to any subsequent exchanges
between such Class A shares and Units with respect to shares on which the
initial sales charge has already been paid. In the event that a shareholder
initially purchases Units and then exchanges into Class A shares subject to a
CDSC of an MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth in this paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund 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 in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner}s{ exactly as
the shares are registered and the signature}s{ must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone
redemption privilege must so elect on their Account Application, designate
thereon a bank and account number to receive the proceeds of such redemption,
and sign the Account Application Form with the signature}s{ guaranteed in the
manner set forth below under the caption "Signature Guarantee." The proceeds
of such a redemption, reduced by the amount of any applicable CDSC and the
amount of any income tax required to be withheld, are mailed by check to the
designated account, without charge, if the redemption proceeds do not exceed
$1,000, and are wired in federal funds to the designated account if the
redemption proceeds exceed $1,000. If a telephone redemption request is
received by the Shareholder Servicing Agent by the close of regular trading on
the Exchange on any business day, shares will be redeemed at the closing net
asset value of the Fund on that day. Subject to the conditions described in
this section, proceeds of a redemption are normally mailed or wired on the
next business day following the date of receipt of the order for redemption.
The Shareholder Servicing Agent will not be responsible for any losses
resulting from unauthorized telephone transactions if it follows reasonable
procedures designed to verify the identity of the caller. The Shareholder
Servicing Agent will request personal or other information from the caller,
and will normally also record calls. Shareholders should verify the accuracy
of confirmation statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, 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.
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.
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 certain 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 Plans, 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 of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). 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 Distribution Plan equal, on an annual basis, to
0.75% of the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B
and Class C distribution and service fees for its current fiscal year are
0.25%, 1.00% and 1.00% per annum, respectively. Payment of the 0.10% per annum
Class A distribution fee will commence on such date as the Trustees of the
Trust may determine. Assets attributable to Class A shares sold prior to March
1, 1991 are subject to a service fee of 0.15% per annum.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on an annual basis. In determining the net
investment income available for distributions, the Fund may rely on
projections of its anticipated net investment income over a longer term,
rather than its actual net investment income for the period. The Fund may make
one or more distributions during the calendar year to its shareholders from
any long-term capital gains, and may also make one or more distributions
during the calendar year to its shareholders from short-term capital gains.
Shareholders may elect to receive dividends and capital gain distributions in
either cash or additional shares of the same class with respect to which a
distribution is made. See "Tax Status" and "Shareholder Services --
Distribution Options" below. Distributions paid by the Fund with respect to
Class A shares will generally be greater than those paid with respect to Class
B and Class C shares because expenses attributable to Class B and Class C
shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986 as amended (the "Code"). 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. A portion of the dividends received from the Fund (but none of the
Fund's capital gains distributions) may qualify for the dividends received
deduction for corporations. Shortly after the end of each calendar year, each
shareholder will be sent a statement setting forth the federal income tax
status of all dividends and distributions for that 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), the
portion, if any, representing a return of capital (which is generally free of
current taxes but results in a basis reduction) and the amount, if any, of
federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (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
additional information regarding backup withholding of federal income tax and
should consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the
Fund's assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued on the basis of their current values or otherwise at their fair values,
as described in the SAI. All investments and assets are expressed in U.S.
dollars based upon current currency exchange rates. The net asset value of
each class of shares is effective for orders received by the dealer prior to
its calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three 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 certain institutional investors,
entitled Class I shares. The Trust has reserved the right to create and issue
additional classes and series of shares, in which case each class of shares of
a series would participate equally in the earnings, dividends and assets
attributable to that class of that particular series. Shareholders are
entitled to one vote for each share held and shares of each series would be
entitled to vote separately to approve investment advisory agreements or
changes in investment restrictions, but shares of all series would vote
together in the election of Trustees and selection of accountants.
Additionally, each class of shares of a series will vote separately on any
material increases in the fees under 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 matters.
The Trust does not intend to hold annual shareholder meetings. The Declaration
of Trust provides that a Trustee may be removed from office in certain
instances (see "Description of Shares, Voting Rights and Liabilities" in the
SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above in "Purchases -- Conversion of Class B Shares"). Shares are
fully paid and non-assessable. Should the Fund be liquidated, shareholders of
each class are entitled to share pro rata in the net assets attributable to
that class available for distribution to shareholders. Shares will remain on
deposit with the Shareholder Servicing Agent and certificates will not be
issued except in connection with pledges and assignments and in certain other
limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed (e.g., fidelity bonding and errors and omissions
insurance) and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Securities
Corporation and Wiesenberger Investment Companies Service. Total rate of
return quotations will reflect the average annual percentage change over
stated periods in the value of an investment in a class of shares of the Fund
made at the maximum public offering price of shares of that class with all
distributions reinvested and which will give effect to the imposition of any
applicable CDSC assessed upon redemptions of the Fund's Class B and Class C
shares. Such total rate of return quotations may be accompanied by quotations
which do not reflect the reduction in value of the initial investment due to
the sales charge or the deduction of a CDSC, and which will thus be higher.
The Fund offers multiple classes of shares which were initially offered for
sale to, and purchased by, the public on different dates (the "class inception
date"). The calculation of total rate of return for a class of shares which
has a later class inception date than another class of shares of the Fund is
based both on }i{ the performance of the Fund's newer class from its inception
date and (ii) the performance of the Fund's oldest class from its inception
date up to the class inception date of the newer class. See the SAI for
further information on the calculation of total rate of return for share
classes with different class inception dates.
The Fund's total rate of return quotations are based on historical performance
and are not intended to indicate future performance. Total rate of return
reflects all components of investment return over a stated period of time. The
Fund's quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders. For a discussion of the
manner in which the Fund will calculate its total rate of return, see the SAI.
For further information about the Fund's performance for the fiscal year ended
November 30, 1997, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number). In addition to
information provided in shareholder reports, the Fund may, in its discretion,
from time to time, make a list of all or a portion of its holdings available
to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At
the end of each calendar year, each shareholder will receive income tax
information regarding reportable dividends and capital gain distributions for
that year (see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive
dividends and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record, 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 dividend or distribution. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of any class of other MFS
Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if
the intended purchases are not completed, by completing the Letter of Intent
section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, B and C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the
same class of another MFS Fund. Furthermore, distributions made by the Fund
may be automatically invested at net asset value (and without any applicable
CDSC) in shares of the same class of another MFS Fund, if shares of such Fund
are available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan ("SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the
SWP. The CDSC will not be waived in the case of SWP redemptions of Class A
shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account 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.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of other MFS Funds under the Automatic Exchange Plan. The Automatic Exchange
Plan provides for automatic monthly or quarterly exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder if such fund is
available for sale. Under the Automatic Exchange Plan, exchanges of at least
$50 each may be made to up to 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 a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans
and other corporate pension and profit-sharing plans. Investors should consult
with their tax adviser before establishing any of the tax-deferred retirement
plans described above.
--------------------
The Fund's SAI, dated April 1, 1998, as amended or supplemented from time to
time, contains more detailed information about the Trust and the Fund,
including, but not limited to, information related to (i) investment
objective, policies and restrictions, including the purchase and sale of
options, Futures Contracts, Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies, (ii) the Trustees, officers and investment
adviser, (iii) portfolio trading, (iv) the Fund's shares, including rights
and liabilities of shareholders, (v) tax status of dividends and
distributions, (vi) the Distribution Plan, (vii) the method used to calculate
total rate of return quotations and (viii) various services and privileges
provided by the Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares 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
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired
employees) and agents of MFS, Sun Life Assurance Company of Canada
("Sun Life") or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which
MFD serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases -- General
-- Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the 401(a) or
ESP Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the 401(a) or ESP Plan
sponsor subscribes to the MFS FUNDamental 401(k) Plan or another
similar recordkeeping system made available by the Shareholder
Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the
later to occur of: (i) January 1, 1993 or (ii) the date such 401(a)
or ESP Plan first invests its assets in one or more of the MFS
Funds. The sales charges will be waived in the case of a redemption
of all of the 401(a) or ESP Plan's shares in all MFS Funds (i.e.,
all the assets of the 401(a) or ESP Plan invested in the MFS Funds
are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the 401(a) or ESP Plan in shares of the
MFS Funds (excluding the reinvestment of distributions) during the
prior four years equals 50% or more of the total value of the 401(a)
or ESP Plan's assets in the MFS Funds, in which case the sales
charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by 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
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to which
such Plan or its sponsoring organization subscribes to the MFS
FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program (but
not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include
a requirement that such shares be sold for the sole benefit of
clients participating in a "wrap" account, mutual fund "Supermarket"
Account or a similar program under which such clients pay a fee to
such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts whose third
party administrators, or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o 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)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by
the shareholder in the Eligible Funds subject to such requirements
as may be established from time to time by MFD (for a schedule of
the amount of commissions paid by MFD to the dealer on such
investments, see "Purchases -- Class A Shares -- Purchases Subject
to a CDSC" in the Prospectus). The Eligible Funds are all funds
included in the MFS Family of Funds, except for Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Municipal Bond Fund, MFS Municipal Limited Maturity Fund, MFS Money
Market Fund, MFS Government Money Market Fund and MFS Cash Reserve
Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms
acting as trustee or manager for trust accounts which have entered
into an administrative services agreement with MFS 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:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRA's
where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986 as amended) of the account value at
the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification form
is required to be submitted to 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
o Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt instruments
with the same maturity, coupon and rating may have different yields while debt
instruments of the same maturity and coupon with different ratings may have
the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
3. there is a lack of essential data pertaining to the issue or issuer;
and
4. the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated "AAA" has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated "AA" differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is VERY STRONG.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated "BBB" exhibits ADEQUATE protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having
significant speculative characteristics. BB indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated "B" is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated "CCC" is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: 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
Investment Grade
AAA: Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of
some kind appears probable. "C" ratings signal imminent default.
DDD, DD, D Default. 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%.
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED
BY U.S. GOVERNMENT AGENCIES, AUTHORITIES OR
INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities
of the U.S. Government are established under the authority of an act of
Congress and include, but are not limited to, the Tennessee Valley Authority,
the Bank for Cooperatives, the Farmers Home Administration, Federal Home Loan
Banks, Federal Intermediate Credit Banks and Federal Land Banks, as well as
those listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS are bonds issued
by a cooperatively owned nationwide system of banks and associations
supervised by the Farm Credit Administration. These bonds are not guaranteed
by the U.S. Government.
MARITIME ADMINISTRATION BONDS are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which
represent a partial ownership interest in a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations. Each mortgage loan included in the pool is also insured or
guaranteed by the Federal Housing Administration, the Veterans Administration
or the Farmers Home Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS are bonds issued and guaranteed
by the Federal Home Loan Mortgage Corporation and are not guaranteed by the
U.S. Government.
FEDERAL HOME LOAN BANK BONDS are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S. Government.
FINANCING CORPORATION BONDS AND NOTES are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS are bonds issued and guaranteed
by the Federal National Mortgage Association and are not guaranteed by the
U.S. Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES are debentures backed by the
Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-
through certificates, are supported by the full faith and credit of the U.S.
Government; others, such as securities of FNMA, by the right of the issuer to
borrow from the U.S. Treasury; still others, such as bonds issued by SLMA, are
supported only by the credit of the instrumentality. No assurance can be given
that the U.S. Government will provide financial support to instrumentalities
sponsored by the U.S. Government as it is not obligated by law, in certain
instances, to do so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the
Fund intends to invest, the Fund may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
<PAGE>
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN
U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in
a bank (including eligible foreign branches of U.S. banks), for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS include bonds and notes issued by corporations in order
to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P or Fitch and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P or
Fitch, and issues so rated are regarded as having the greatest capacity for
timely payment. Issues in the "A" category are delineated with the numbers 1,
2 and 3 to indicate the relative degree of safety. The A-1 designation
indicates that the degree of safety regarding timely payment is either
overwhelming or very strong. Those A-1 issues determined to possess
overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structure with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial markets
and assured sources of alternate liquidity.
<PAGE>
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend
Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
MEG-1-4/98/1.6MM 07/207/307
<PAGE>
[GRAPHIC OMITTED]
INVESTMENT MANAGEMENT
MFS(R) EMERGING STATEMENT OF
GROWTH FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) April 1, 1998
- ------------------------------------------------------------------------------
Page
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1. Definitions ....................................................... 2
2. Certain Securities and Investment Techniques ...................... 2
3. Investment Restrictions ........................................... 11
4. Management of the Fund ............................................ 12
Trustees ........................................................ 12
Officers ........................................................ 13
Trustee Compensation Table ...................................... 13
Investment Adviser .............................................. 14
Administrator ................................................... 14
Custodian ....................................................... 15
Shareholder Servicing Agent ..................................... 15
Distributor ..................................................... 15
5. Portfolio Transactions and Brokerage Commissions .................. 16
6. Shareholder Services .............................................. 17
Investment and Withdrawal Programs .............................. 17
Exchange Privilege .............................................. 19
Tax-Deferred Retirement Plans ................................... 19
7. Tax Status ........................................................ 20
8. Determination of Net Asset Value; Performance Information ......... 21
9. Distribution Plan ................................................. 23
10. Description of Shares, Voting Rights and Liabilities .............. 24
11. Independent Auditors and Financial Statements ..................... 24
Appendix A ........................................................ A-1
MFS EMERGING GROWTH FUND
A Series of MFS Series Trust II
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, 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 April 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 Emerging Growth Fund, a diversified series of
MFS Series Trust II (the "Trust"), a
Massachusetts business trust. The Trust was known
as MFS Lifetime Emerging Growth Fund until August
1, 1993 and was known as Lifetime Emerging Growth
Trust prior to August 3, 1992. The MFS Emerging
Growth Fund is the successor to the MFS Lifetime
Emerging Growth Fund, which was reorganized as a
series of the Trust on September 7, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus -- The Prospectus of the Fund, dated April 1, 1998,
as amended or supplemented from time to time.
2. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment techniques and securities
transactions are described in greater detail below.
LENDING OF SECURITIES
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will usually not exceed five days). During the existence of a
loan, the Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned. The Fund would also
receive a fee from the borrower or 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 fail financially. However, the loans would be
made only to firms deemed by the Adviser to be of good standing, and when, in
the judgment of the Adviser, the consideration which could be earned currently
from securities loans of this type justifies the attendant risk. If the
Adviser determines to make securities loans, it is not intended that the value
of the securities loaned would exceed 20% of the value of the Fund's total
assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have 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 SEC policies,
purchases of securities on such bases may involve more risk than other types
of purchases. For example, the Fund may have to sell assets which have been
set aside in order to meet redemptions. Also, if the Fund determines it is
necessary to sell the "when-issued" or "forward delivery" securities before
delivery, it may incur a loss because of market fluctuations since the time
the commitment to purchase such securities was made. When the time comes to
pay for "when-issued" or "forward delivery" securities, the Fund will meet its
obligations from the then-available cash flow on the sale of securities, or,
although it would not normally expect to do so, from the sale of the "when-
issued" or "forward delivery" securities themselves (which may have a value
greater or less than the Fund's payment obligation).
CORPORATE ASSET-BACKED SECURITIES
As described in the Prospectus, the Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers
to retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
The underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities" weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures payment through insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties. The Fund will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
or failure of the credit support could adversely affect the return on an
investment in such a security.
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund may enter into repurchase agreements
with sellers who are member firms (or subsidiaries thereof) of the Exchange,
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that the Fund purchases and holds
through its agent are U.S. Government securities, the values, including
accrued interest, of which are equal to or greater than the repurchase price
agreed to be paid by the seller. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a standard rate due to the
Fund together with the repurchase price on repurchase. In either case, the
income to the Fund is unrelated to the interest rate on the U.S. Government
securities.
The repurchase agreement provides that in the event the seller fails to pay
the 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 the
seller's creditworthiness on an ongoing basis. Moreover, under such
agreements, the value, including accrued interest, of the securities (which
are marked to market every business day) is required to be greater than the
repurchase price, and the Fund has the right to make margin calls at any time
if the value of the securities falls below the agreed upon collateral.
LOANS AND OTHER DIRECT INDEBTEDNESS
As described in the Prospectus, the Fund may purchase loans and other direct
indebtedness. In purchasing a loan, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, although some may be unsecured. Such
loans may be in default at the time of purchase. Loans and other direct
indebtedness that are fully secured offer the Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a
secured loan or other direct indebtedness would satisfy the corporate
borrower's obligation, or that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans and other direct indebtedness loans
are typically made by a syndicate of lending institutions, represented by an
agent lending institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts due on its
own behalf and on behalf of the others in the syndicate, and for enforcing its
and their other rights against the borrower. Alternatively, such loans and
other direct indebtedness may be structured as a novation, pursuant to which
the Fund would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Fund would purchase an assignment
of a portion of a lender's interest in a loan or other direct indebtedness
either directly from the lender or through an intermediary. The Fund may also
purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods or services. These claims may
also be purchased at a time when the company is in default.
Certain of the loans and other direct indebtedness acquired by the Fund may
involve revolving credit facilities or other standby financing commitments
which obligate the Fund to pay additional cash on a certain date or on demand.
These commitments may have the effect of requiring the Fund to increase its
investment in a company at a time when the Fund might not otherwise decide to
do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that the Fund is
committed to advance additional funds, it will at all times hold and maintain
in a segregated account liquid assets in an amount sufficient to meet such
commitments.
The Fund's ability to receive payment of principal, interest and other amounts
due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loans and other direct
indebtedness which the Fund will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower.
As the Fund may be required to rely upon another lending institution to
collect and pass on to the Fund amounts payable with respect to the loan and
to enforce the Fund's rights under the loan and other direct indebtedness, an
insolvency, bankruptcy or reorganization of the lending institution may delay
or prevent the Fund from receiving such amounts. In such cases, the Fund will
evaluate as well the creditworthiness of the lending institution and will
treat both the borrower and the lending institution as an "issuer" of the loan
for purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such loans
and other direct indebtedness especially vulnerable to adverse changes in
economic or market conditions. Investments in such loans and other direct
indebtedness may involve additional risk to the Fund. For example, if a loan
or other direct indebtedness is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the Fund could be held
liable. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Adviser's
research in an attempt to avoid situations where fraud and misrepresentation
could adversely affect the Fund. In addition, loans and other direct
investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market
value. To the extent that the Adviser determines that any such investments are
illiquid, the Fund will include them in the investment limitations described
below.
FOREIGN SECURITIES
The Fund may invest up to 25% (and expects generally to invest between 0% to
10%) of its total assets in foreign securities (not including American
Depositary Receipts ("ADRs"). As discussed in the Prospectus, investing in
foreign securities generally presents a greater degree of risk than investing
in domestic securities due to possible exchange rate fluctuations, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war or expropriation. As a result
of its investments in foreign securities, the Fund may receive interest or
dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are
denominated. Under certain circumstances, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies
are received or the Adviser anticipates, for any other reason, that the
exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. The Fund may also hold foreign currency in
anticipation of purchasing foreign securities. While the holding of currencies
will permit the Fund to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Fund to risk of loss
if exchange rates move in a direction adverse to the Fund's position. Such
losses could reduce any profits or increase any losses sustained by the Fund
from the sale or redemption of securities and could reduce the dollar value of
interest or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS
The Fund may invest in ADRs which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. ADRs may be
sponsored or unsponsored. A sponsored ADR is issued by a depository which has
an exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. Under the
terms of most sponsored arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depository of an unsponsored ADR, on
the other hand, is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass
through voting rights to ADR holders in respect of the deposited securities.
The Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the use
of the depository receipts in the United States can reduce costs and delays as
well as potential currency exchange and other difficulties. The Fund may
purchase securities in local markets and direct delivery of these ordinary
shares to the local depository of an ADR agent bank in the foreign country.
Simultaneously, the ADR agents create a certificate which settles at the
Fund's custodian in five days. The Fund may also execute trades on the U.S.
markets using existing ADRs. A foreign issuer of the security underlying an
ADR is generally not subject to the same reporting requirements in the United
States as a domestic issuer. Accordingly the information available to a U.S.
investor will be limited to the information the foreign issuer is required to
disclose in its own country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are traded in foreign currency.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may write
covered call and put options and purchase call and put options on securities.
Call and put options written by the Fund may be covered in the manner set
forth below.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration segregated by the Fund) 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 are
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 is equal to or greater
than the exercise price of the put written or where the exercise price of the
put held is less than the exercise price of the put written if liquid assets
representing the difference are segregated by the Fund. Put and call options
written by the Fund may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counter
party with which, the option is traded, and applicable laws and regulations.
If the writer's obligation is not so covered, it is subject to the risk of the
full change in value of the underlying security from the time the option is
written until exercise.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by liquid assets. Such
transactions permit the Fund to generate additional premium income, which will
partially offset declines in the value of portfolio securities or increases in
the cost of securities to be acquired. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other investments of the Fund, provided
that another option on such security is not written. If the Fund desires to
sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction in connection with the option
prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the premium paid
in connection with the closing of an option written by the Fund is less than
the premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than
the premium paid for the original purchase. Conversely, the Fund will suffer a
loss if the premium paid or received in connection with a closing transaction
is more or less, respectively, than the premium received or paid in
establishing the option position. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option
previously written by the Fund is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of
the underlying security will decline moderately during the option period. Buy-
and-write transactions using out-of-the-money call options may be used when it
is expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such transactions, the
Fund's maximum gain will be the premium received by it for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price, less related transaction costs.
If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by
the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Fund may elect to close the position or retain the option until it is
exercised, at which time the Fund will be required to take delivery of the
security at the exercise price; the Fund's return will be the premium received
from the put option minus the amount by which the market price of the security
is below the exercise price, which could result in a loss. Out-of-the-money,
at-the-money and in-the-money put options may be used by the Fund in the same
market environments that call options are used in equivalent buy-and-write
transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs,
the call will likely be exercised and the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be
effective, therefore, only where the price of the security remains stable and
neither the call nor the put is exercised. In those instances where one of the
options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, the Fund assumes the risk that
it may be required to purchase the underlying security for an exercise price
above its then current market value, resulting in a capital loss unless the
security subsequently appreciates in value. The writing of options on
securities will not be undertaken by the Fund solely for hedging purposes, and
could involve certain risks which are not present in the case of hedging
transactions. Moreover, even where options are written for hedging purposes,
such transactions constitute only a partial hedge against declines in the
value of portfolio securities or against increases in the value of securities
to be acquired, up to the amount of the premium.
The Fund may purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, the Fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of
the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price
of securities that the Fund anticipates purchasing in the future. If such
increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
In certain instances, the Fund may enter into options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of
each such option. Like other types of options, these transactions, which may
be referred to as "reset" options or "adjustable strike" options, grant the
purchaser the right to purchase (in the case of a "call") or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of options, however, the price at which the underlying
security may be purchased or sold under a "reset" option is determined at
various intervals during the term of the option, and such price fluctuates
from interval to interval based on changes in the market value of the
underlying security. As a result, the strike price of a "reset" option, at the
time of exercise, may be less advantageous to the Fund than if the strike
price had been fixed at the initiation of the option. In addition, the premium
paid for the purchase of the option may be determined at the termination,
rather than the initiation, of the option. If the premium is paid at
termination, the Fund assumes the risk that (i) the premium may be less than
the premium which would otherwise have been received at the initiation of the
option because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option.
OPTIONS ON STOCK INDICES -- As noted in the Prospectus, the Fund may write
(sell) covered call and put options and purchase call and put options on stock
indices. In contrast to an option on a security, an option on a stock index
provides the holder with the right but not the obligation to make or receive a
cash settlement upon exercise of the option, rather than the right to purchase
or sell a security. The amount of this settlement is equal to (i) the amount,
if any, by which the fixed exercise price of the option exceeds (in the case
of a call) or is below (in the case of a put) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier."
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities in its portfolio. Where the
Fund covers a call option on a stock index through ownership of securities,
such securities may not match the composition of the index and, in that event,
the Fund will not be fully covered and could be subject to risk of loss in the
event of adverse changes in the value of the index. The Fund may also cover
call options on stock indices by holding a call on the same index and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if liquid assets
representing the difference are segregated by the Fund. The Fund may cover put
options on stock indices by maintaining liquid assets with a value equal to
the exercise price in a segregated account, or by holding a put on the same
stock index and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written or where the exercise price of the put held is less than
the exercise price of the put written if liquid assets representing the
difference are segregated by the Fund. Put and call options on stock indices
may also be covered in such other manner as may be in accordance with the
rules of the exchange on which, or the counterparty with which, the option is
traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a
profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investments. By writing a put option, the
Fund assumes the risk of a decline in the index. To the extent that the price
changes of securities owned by the Fund correlate with changes in the value of
the index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be offset
in part by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, the Fund will seek to offset a decline in the value of securities it
owns through appreciation of the put option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the option
does not increase, the Fund's loss will be limited to the premium paid for the
option plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or a
portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially fully
invested is a form of leverage, up to the amount of the premium and related
transaction costs, and involves risks of loss and of increased volatility
similar to those involved in purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index, such
as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
Index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based on narrower
market indices, such as the Standard & Poor's 100 Index, or on indices of
securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market
values of the stocks so included. The composition of the index is changed
periodically.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may enter into stock
index futures contracts. (Unless otherwise specified, futures contracts on
indices are referred to as "Futures Contracts.") Such investment strategies
will be used for hedging purposes and for non-hedging purposes, subject to
applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument, or for the
making and acceptance of a cash settlement, at a stated time in the future for
a fixed price. By its terms, a Futures Contract provides for a specified
settlement date on which, in the case of stock index futures contracts, the
difference between the price at which the contract was entered into and the
contract's closing value is settled between the purchaser and seller in cash.
Futures Contracts differ from options in that they are bilateral agreements,
with both the purchaser and the seller equally obligated to complete the
transaction. Futures Contracts call for settlement only on the expiration date
and cannot be "exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale
of a security or the purchase of an option in that no purchase price is paid
or received. Instead, an amount of cash or cash equivalents, which varies but
may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the
broker, referred to as "variation margin," are made on a daily basis as the
value of the index or instrument underlying the Futures Contract fluctuates,
making positions in the Futures Contract more or less valuable -- a process
known as "marking to the market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Fund's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or part, by gains on the futures position.
When the Fund is not fully invested in the securities market and anticipates a
significant market advance, it may purchase stock index futures contracts in
order to gain rapid market exposure that may, in part or entirely, offset
increases in the cost of securities that the Fund intends to purchase. As such
purchases are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Fund will purchase such securities upon termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may
purchase and write options to buy or sell Futures Contracts in which it may
invest ("Options on Futures Contracts"). Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law.
An Option on a Futures Contract provides the holder with the right to enter
into a "long" position in the underlying Futures Contract, in the case of a
call option, or a "short" position in the underlying Futures Contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option
by the holder, the contract market clearinghouse establishes a corresponding
short position for the writer of the option, in the case of a call option, or
a corresponding long position in the case of a put option. In the event that
an option is exercised, the parties will be subject to all the risks
associated with the trading of Futures Contracts, such as payment of initial
and variation margin deposits. In addition, the writer of an Option on a
Futures Contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodities Futures Trading Commission ("CFTC") and the performance guarantee
of the exchange clearinghouse. In addition, Options on Futures Contracts may
be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract
and in the same principal amount as the call written where the exercise price
of the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if
liquid assets representing the difference are 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 where the exercise price of the put held is less than the exercise price of
the put written if liquid assets representing the difference are segregated by
the Fund. Put and call Options on Futures Contracts may also be covered in
such other manner as may be in accordance with the rules of the exchange on
which the option is traded and applicable laws and regulations. Upon the
exercise of a call Option on a Futures Contract written by the Fund, the Fund
will be required to sell the underlying Futures Contract which, if the Fund
has covered its obligation through the purchase of such Contract, will serve
to liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by the Fund is exercised, the Fund will be required to
purchase the underlying Futures Contract which, if the Fund has covered its
obligation through the sale of such Contract, will close out its futures
position.
The writing of a call Option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing
of a put Option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and the changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline or changes in interest or
exchange rates, the Fund could, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease occurs, it may be offset,
in whole or part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Fund could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward foreign currency
exchange contracts ("Forward Contracts") for hedging and non-hedging purposes.
Forward Contracts may be used for hedging to attempt to minimize the risk to
the Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies. The Fund intends to enter into Forward Contracts for
hedging purposes. In particular, a Forward Contract to sell a currency may be
entered into where the Fund seeks to protect against an anticipated increase
in the exchange rate for a specific currency which could reduce the dollar
value of portfolio securities denominated in such currency. Conversely, the
Fund may enter into a Forward Contract to purchase a given currency to protect
against a projected increase in the dollar value of securities denominated in
such currency which the Fund intends to acquire. The Fund also may enter into
a Forward Contract in order to assure itself of a predetermined exchange rate
in connection with a security denominated in a foreign currency. In addition,
the Fund may enter into Forward Contracts for "cross hedging" purposes; e.g.,
the purchase or sale of a Forward Contract on one type of currency as a hedge
against adverse fluctuations in the value of a second type of currency.
If a hedging transaction in Forward Contracts is successful, the decline in
the value of portfolio securities or other assets or the increase in the cost
of securities or other assets to be acquired may be offset, at least in part,
by profits on the Forward Contract. Nevertheless, by entering into such
Forward Contracts, the Fund may be required to forgo all or a portion of the
benefits which otherwise could have been obtained from favorable movements in
exchange rates. The Fund will usually seek to close out positions in such
contracts by entering into offsetting transactions, which will serve to fix
the Fund's profit or loss based upon the value of the contracts at the time
the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other than
hedging purposes, which present greater profit potential but also involve
increased risk. For example, the Fund may purchase a given foreign currency
through a Forward Contract if, in the judgment of the Adviser, the value of
such currency is expected to rise relative to the U.S. dollar. Conversely, the
Fund may sell the currency through a Forward Contract if the Adviser believes
that its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency exchange
rates occurs, which will increase its gross income. Where exchange rates do
not move in the direction or to the extent anticipated, however, the Fund may
sustain losses which will reduce its gross income. Such transactions,
therefore, could be considered speculative and could involve significant risk
of loss.
The Fund has established procedures 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 liquid assets, which will be marked to
market on a daily basis, in an amount equal to the value of its commitments
under Forward Contracts. While these contracts are not presently regulated by
the CFTC, the CFTC may in the future assert authority to regulate Forward
Contracts. In such event, the Fund's ability to utilize Forward Contracts in
the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES
As noted in the Prospectus, the Fund may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in which Forward
Contracts will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put options on the foreign
currency. If the value of the currency does decline, the Fund will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of
such securities, the Fund may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forgo a portion or all of
the benefits of advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by the
Fund will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the
writing of a foreign currency option will constitute only a partial hedge up
to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Fund also may be required to forgo all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
RISK FACTORS IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S PORTFOLIO.
The Fund's abilities effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies depend on the
degree to which price movements in the underlying index or instrument correlate
with price movements in the relevant portion of the Fund's portfolio. In the
case of futures and options based on an index, the portfolio will not duplicate
the components of the index, and in the case of futures and options on fixed
income securities, the portfolio securities which are being hedged may not be
the same type of obligation underlying such contract. The use of Forward
Contracts for "cross hedging" purposes may involve greater correlation risks. As
a result, the correlation probably will not be exact. Consequently, the Fund
bears the risk that the price of the portfolio securities being hedged will not
move in the same amount or direction as the underlying index or obligation.
For example, if the Fund purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, the Fund may enter into transactions in Forward Contracts or options
on foreign currencies in order to hedge against exposure arising from the
currencies underlying such forwards. In such instances, the Fund will be
subject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group,
may present greater risk than options or futures based on a broad market
index. This is due to the fact that a narrower index is more susceptible to
rapid and extreme fluctuations as a result of changes in the value of a small
number of securities. Nevertheless, where the Fund enters into transactions in
options or futures on narrow-based indices for hedging purposes, movements in
the value of the index should, if the hedge is successful, correlate closely
with the portion of the Fund's portfolio or the intended acquisitions being
hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between
movements in the futures or option price and the price of the underlying index
or obligation. The anticipated spread between the prices may be distorted due
to the differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the options, futures and forward markets. In this regard,
trading by speculators in options, futures and Forward Contracts has in the
past occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies and Options on Futures Contracts, the Fund is subject to
the risk of market movements between the time that the option is exercised and
the time of performance thereunder. This could increase the extent of any loss
suffered by the Fund in connection with such transactions.
In writing a covered call option on a security, index or Futures Contract, the
Fund also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying index or instrument. For example, where the Fund covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Fund may not be
fully covered. As a result, the Fund could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indices or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of the Fund's portfolio. When the Fund writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option,
in the case of a call, or fall below the exercise price, in the case of a put,
the option will not be exercised and the Fund will retain the amount of the
premium, less related transaction costs, which will constitute a partial hedge
against any decline that may have occurred in the Fund's portfolio holdings or
any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of
the holder to warrant exercise of the option, however, and the option is
exercised, the Fund will incur a loss which may only be partially offset by
the amount of the premium it received. Moreover, by writing an option, the
Fund may be required to forgo the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other assets
or a decline in the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the
hedging transactions.
It should also be noted that the Fund may enter into transactions in options
(except for options on foreign currencies), Futures Contracts, Options on
Futures Contracts and Forward Contracts not only for hedging purposes, but
also for non-hedging purposes intended to increase portfolio returns. Non-
hedging transactions in such investments involve greater risks and may result
in losses which may not be offset by increases in the value of portfolio
securities or declines in the cost of securities to be acquired. The Fund will
only write covered options, such that liquid securities necessary to satisfy
an option exercise will be segregated at all times, unless the option is
covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations.
Nevertheless, the method of covering an option employed by the Fund may not
fully protect it against risk of loss and, in any event, the Fund could suffer
losses on the option position which might not be offset by corresponding
portfolio gains.
The Fund also may enter into transactions in Futures Contracts, Options on
Futures Contracts and Forward Contracts for other than hedging purposes, which
could expose the Fund to significant risk of loss if foreign currency exchange
rates do not move in the direction or to the extent anticipated. In this
regard, the foreign currency may be extremely volatile from time to time, as
discussed in the Prospectus and in this SAI, and the use of such transactions
for non-hedging purposes could therefore involve significant risk of loss.
With respect to the writing of straddles on securities, the Fund incurs the
risk that the price of the underlying security will not remain stable, that
one of the options written will be exercised and that the resulting loss will
not be offset by the amount of the premiums received. Such transactions,
therefore, create an opportunity for increased return by providing the Fund
with two simultaneous premiums on the same security, but involve additional
risk, since the Fund may have an option exercised against it regardless of
whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While the Fund will enter into options or futures positions only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by the Fund, and the Fund could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Fund
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it
is disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Fund's ability
effectively to hedge its portfolio, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon
may be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities or other assets held by the Fund or decreases in the prices of
securities or other assets the Fund intends to acquire. Where the Fund enters
into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Fund to
greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular
futures or option contract. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the
portfolio of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an
Option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin payments,
as well as the additional risk that movements in the price of the option may
not correlate with movements in the price of the underlying security, index,
currency or Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on
the value of positions held by the Fund. Further, the value of such positions
could be adversely affected by a number of other complex political and
economic factors applicable to the countries issuing the underlying
currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign currency
market is a global, 24-hour market, events could occur in that market which
will not be reflected in the forward, futures or options markets until the
following day, thereby making it more difficult for the Fund to respond to
such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make delivery
of such currencies in conformity with any U.S. or foreign restrictions and
regulations regarding the maintenance of foreign banking relationships, fees,
taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of Forward Contracts could lose
amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund.
Where no such counterparty is available, it will not be possible to enter into
a desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and the Fund could be required to
retain options purchased or written, or Forward Contracts entered into, until
exercise, expiration or maturity. This in turn could limit the Fund's ability
to profit from open positions or to reduce losses experienced, and could
result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. The
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the
same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection
with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or prohibitions
on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes
of the Commodity Exchange Act, regulations of the CFTC require that the Fund
enter into transactions in Futures Contracts, 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.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following
procedure. Except as provided below, the Fund intends to write over-the-
counter options only with primary U.S. Government securities dealers
recognized as such by the Federal Reserve Bank of New York. Also, the
contracts the Fund has in place with such primary dealers provide that the
Fund has the absolute right to repurchase an option it writes at any time at a
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
generally is based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
the-money. The Fund will treat all or a portion of the formula as illiquid for
purposes of the SEC illiquidity ceiling test imposed by the SEC staff. The
Fund may also write over-the-counter options with non-primary dealers,
including foreign dealers (where applicable), and will treat the assets used
to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Fund's shares (which,
as used in this SAI, means the lesser of (i) more than 50% of the outstanding
shares of the Trust or a series or class, as applicable, or (ii) 67% or more
of the outstanding shares of the Trust or a series or class, as applicable,
present at a meeting if holders of more than 50% of the outstanding shares of
the Trust or a series or class, as applicable, are represented in person or by
proxy). Except with respect to the Fund's policy on borrowing and the Fund's
nonfundamental investment policy regarding illiquid securities, these
investment restrictions and policies are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its total assets,
and then only as a temporary measure for extraordinary or emergency
purposes, or pledge, mortgage or hypothecate an amount of its assets (taken
at market value) in excess of 15% of its total assets, in each case taken at
the lower of cost or market value. For the purpose of this restriction,
collateral arrangements with respect to options, Futures Contracts, Options
on Futures Contracts, Forward Contracts and options on foreign currencies,
and payments of initial and variation margin in connection therewith, are
not considered a pledge of assets.
(2) Underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security.
(3) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the attainment of its investment objective, the Fund
may invest up to 25% of its assets (taken at market value at the time of
each investment) in securities of issuers in any one industry.
(4) Purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment
trusts, which deal in real estate or interests therein and securities
secured by real estate), or mineral leases, commodities or commodity
contracts (except contracts for the future or forward delivery of securities
or foreign currencies and related options, and except Futures Contracts and
Options on Futures Contracts) in the ordinary course of its business. The
Fund reserves the freedom of action to hold and to sell real estate or
mineral leases, commodities or commodity contracts acquired as a result of
the ownership of securities.
(5) Make loans to other persons except by the purchase of obligations in
which the Fund is authorized to invest and by entering into repurchase
agreements; provided that the Fund may lend its portfolio securities
representing not in excess of 30% of its total assets (taken at market
value). Not more than 10% of the Fund's total assets (taken at market value)
may be invested in repurchase agreements maturing in more than seven days.
The Fund may purchase all or a portion of an issue of debt securities
distributed privately to financial institutions. For these purposes the
purchase of short-term commercial paper or a portion or all of an issue of
debt securities which are part of an issue to the public shall not be
considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market
value) to be invested in the securities of such issuer, other than U.S.
Government securities.
(7) Purchase voting securities of any issuer if such purchase, at the
time thereof, would cause more than 10% of the outstanding voting securities
of such issuer to be held by the Fund; or purchase securities of any issuer
if such purchase at the time thereof would cause more than 10% of any class
of securities of such issuer to be held by the Fund. For this purpose all
indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Trust, or is a member, partner, officer or
Director of the Adviser, if after the purchase of the securities of such
issuer by the Fund one or more of such persons owns beneficially more than
1/2 of 1% of the shares or securities, or both, all taken at market value,
of such issuer, and such persons owning more than 1/2 of 1% of such shares
or securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value.
(10) Purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of securities and the Fund may make
margin deposits in connection with options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign currencies.
(11) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities without payment of further consideration equivalent in kind and
amount to the securities sold and provided that if such right is conditional
the sale is made upon equivalent conditions.
(12) Purchase securities issued by any other registered investment company
or investment trust except by purchase in the open market where no
commission or profit to a sponsor or dealer results from such purchase other
than the customary broker's commission, or except when such purchase, though
not made in the open market, is part of a plan of merger or consolidation;
provided, however, that the Fund will not purchase such securities if such
purchase at the time thereof would cause more than 10% of its total assets
(taken at market value) to be invested in the securities of such issuers;
and, provided further, that the Fund will not purchase securities issued by
an open-end investment company.
(13) Write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the Fund from writing,
purchasing and selling puts, calls or combinations thereof with respect to
securities, indexes of securities or foreign currencies, and with respect to
Futures Contracts.
(14) Issue any senior security (as that term is defined in the 1940 Act),
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder. For the purposes of this restriction,
collateral arrangements with respect to options, Futures Contracts and
Options on Futures Contracts and collateral arrangements with respect to
initial and variation margins are not deemed to be the issuance of a senior
security.
As non-fundamental policies, the Fund will not (i) knowingly invest in
securities which are subject to legal or contractual restrictions on resale
(other than repurchase agreements), unless the Board of Trustees has
determined that such securities are liquid based upon trading markets for the
specific security, if, as a result thereof, more than 15% of the Fund's net
assets (taken at market value) would be so invested or (ii) invest 25% or more
of the market value of its total assets in securities of issuers in any one
industry.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in companies which,
including their respective predecessors, have a record of less than three
years" continuous operation.
In order to comply with certain state statutes, the Fund will not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio securities
if the percentage of securities so pledged, mortgaged or hypothecated would
exceed 33 1/3%.
These operating policies are not fundamental and may be changed without
shareholder approval.
4. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Fund. The Adviser is responsible for the investment management of the
Fund's assets and the officers of the Trust are responsible for its
operations. The Trustees and officers of the Trust are listed below, together
with their principal occupations during the past five years. (Their titles may
have varied during that period.)
TRUSTEES
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
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; The Bank of N.T. Butterfield
& Son Ltd., Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 8/18/26)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer, Benchmark Consulting Group, Inc. (office services), President;
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* (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 manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
OFFICERS
LESLIE J. NANBERG,* Vice President (born 11/14/45)
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 R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
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).
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).
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston
Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Messrs. Shames and Scott, Directors of MFD, and Mr.
Cavan, the Secretary of MFD, hold similar positions with certain other MFS
affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of Canada
(U.S.) ("Sun Life of Canada (U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended together with such Trustee's out-of-pocket
expenses. The Trust has adopted a retirement plan for non-interested Trustees
and Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 75
and if the Trustee has completed at least five years of service, he would be
entitled to annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 75
and receive reduced payments if he has completed at least five years of
service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Trust for
Messrs. Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current years service and amortize
past service cost.
Set forth below is certain information concerning the cash compensation paid
to the Trustees and benefits accrued, and estimated benefits payable under the
retirement plan.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT
BENEFIT ACCRUED ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey $3,725 $1,005 10 $242,022
Marshall N. Cohan 4,175 2,050 14 148,067
Dr. Lawrence Cohn 3,500 730 18 123,917
Sir David Gibbons 3,725 1,642 13 129,842
Abby M. O'Neill 3,725 837 10 129,842
Walter E. Robb, III 4,175 2,050 15 148,067
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
J. Dale Sherratt 5,300 820 20 184,067
Ward Smith 5,300 1,025 13 184,067
(1) For fiscal year ended November 30, 1997.
(2) Based on normal retirement age of 75. See the table below for the estimated annual benefits payable upon
retirement by the Fund to a Trustee based on his or her estimated credited years of service.
(3) Information provided is for calendar year 1997. All Trustees receiving compensation served as Trustees of 42
funds within the MFS fund complex (having aggregate net assets at December 31, 1997, of approximately $18.9
billion) except Mr. Bailey, who served as Trustee of 69 funds within the MFS fund complex (having aggregate
net assets at December 31, 1997, of approximately $48 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY
FUND UPON RETIREMENT(4)
YEARS OF SERVICE
-----------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ----------------------------------------------------------------------------
$3,150 $473 $ 788 $1,103 $1,575
3,686 553 922 1,290 1,843
4,222 633 1,056 1,478 2,111
4,758 714 1,190 1,665 2,379
5,294 794 1,324 1,853 2,647
5,830 875 1,458 2,041 2,915
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of February 28, 1998, the Trustees and officers, as a group, owned less
than 1% of the outstanding shares of the Fund. As of February 28, 1998,
Merrill Lynch, Pierce, Fenner & Smith Inc., 4800 Deer Lake Drive E., 3rd
Floor, Jacksonville, FL 32232-5286 and Merrill Lynch Trust Co., Trustee FBO
Qualified Retirement Plans, Attention: Greg Valenzano, 265 Davidson Avenue,
Somerset, New Jersey 08873-4120 were the record owners of approximately 5.83%
and 8.37%, of the outstanding Class A shares, respectively, of the Fund. As of
February 28, 1998, Merrill Lynch, Pierce, Fenner & Smith Inc., 4800 Deer Lake
Drive E., 3rd Floor, Jacksonville, Florida 32246-6484 was the record owner of
approximately 18.50% and 43.24% of the outstanding Class B and Class C shares,
respectively, of the Fund. As of February 28, 1998, MFS Defined Contribution
Plan, c/o Mark Leary, Massachusetts Financial Services, 500 Boylston Street,
Boston, Massachusetts 02116-3740, MFS 401-K Plan, c/o Mark Leary, 500 Boylston
Street, Boston, Massachusetts 02116-3740 and United Food & Commercial Workers
Union-Employer Pension Fund, Attention: John Rudman, 3435 Fortuna Drive,
Akron, Ohio 44312-5281 were the record owners of 54.19%, 12.55% and 31.74%,
respectively, of the outstanding Class I shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will
not be provided unless it has been determined pursuant to the Declaration of
Trust, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management
dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc., which in turn is an indirect wholly owned subsidiary
of Sun Life Assurance Company of Canada.
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement with the Fund dated as of August 1, 1993, as amended (the "Advisory
Agreement"). 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 the sum of 0.75% of the first $2.5
billion of the Fund's average daily net assets, 0.70% of the next $4.5 billion
of the amount of average daily net assets in each case on an annualized basis
for its then-current fiscal year, and, effective July 1, 1997, MFS has
voluntarily agreed to reduce its management fee to 0.65% of the Fund's average
daily net assets in excess of $7 billion, in each case, on an annualized basis
for its then-current fiscal year. This voluntary reduction may be rescinded by
MFS only with the approval of the Fund's Board of Trustees.
For the Fund's fiscal year ended November 30, 1997, MFS received $54,601,569,
equivalent on an annualized basis, to 0.71% of the Fund's average daily net
assets, under its investment advisory agreement. For the Fund's fiscal year
ended November 30, 1996, MFS received $34,371,549, equivalent on an annualized
basis, to 0.73% of the Fund's average daily net assets, under its investment
advisory agreement. For the Fund's fiscal year ended November 30, 1995, MFS
received $15,957,197, equivalent on an annualized basis, to 0.73% of the
Fund's average daily net assets, under its investment advisory agreement.
The Fund pays all of its expenses (other than those assumed by the Adviser or
MFD) including: Trustees fees discussed above, governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable
to the Fund; fees and expenses of independent auditors, of legal counsel, and
of any transfer agent, registrar or dividend disbursing agent of the Fund;
expenses of repurchasing and redeeming shares and servicing shareholder
accounts; expenses of preparing, printing and mailing share certificates,
periodic reports, notices and proxy statements to shareholders and to
governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security
transactions; insurance premiums; fees and expenses of State Street Bank and
Trust Company, the Fund's Custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Fund;
and expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses are borne by the Fund except that the
Fund's Distribution Agreement with MFD requires MFD to pay for prospectuses
that are to be used for sales purposes. Expenses of the Trust which are not
attributable to a specific series are allocated among the series in a manner
believed by management of the Trust to be fair and equitable. Payment by the
Fund of brokerage commissions for brokerage and research services of value to
the Adviser in serving its clients is discussed under the caption "Portfolio
Transactions and Brokerage Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its
portfolio transactions and, in general, administering its affairs.
The Advisory Agreement with the Fund will remain in effect until August 1,
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 Restrictions") and,
in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Fund's shares (as defined in
"Investment Restrictions") or by either party on not more than 60 days" nor
less than 30 days" written notice. The Advisory Agreement provides that if MFS
ceases to serve as the Adviser to the Fund, the Fund will change its name so
as to delete the term "MFS" and that MFS may render services to others and may
permit other fund clients to use the term "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution and management
of the Fund, except for willful misfeasance, bad faith or gross negligence in
the performance of its or their duties or by reason of reckless disregard of
its or their obligations and duties under the Advisory Agreement.
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. For the period from March 1,
1997 through November 30, 1997, MFS received fees under the Administrative
Services Agreement of $284,318.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily
net asset value and public offering price of each class of shares of the Fund.
The Custodian does not determine the investment policies of the Fund or decide
which securities the Fund will buy or sell. The Fund may, however, invest in
securities of the Custodian and may deal with the Custodian as principal in
securities transactions. The Custodian also serves as the dividend and
distribution disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Trust, dated as of September
10, 1986 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the
Fund. For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of 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 for the Fund, has
contracted with the Shareholder Servicing Agent to administer and perform
certain dividend disbursing agent functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement
as amended and restated January 1, 1995 (the "Distribution Agreement"). Prior
to January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsiduary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or
periods prior to January 1, 1995, such reference shall be deemed to include
FSI, as the predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of the Class A shares of the Fund is their
net asset value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class A
share of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the sales
charge percentage of offering price applicable to the purchase (see
"Purchases" in the Prospectus). The sales charge scale set forth in the
Prospectus applies to purchases of Class A shares of the Fund alone or in
combination with shares of all classes of certain other funds in the MFS
Family of Funds (the "MFS Funds") and certain other funds (as noted under
Right of Accumulation) by any person, including members of a family unit
(e.g., husband, wife and minor children) and bona fide trustees, and also
applies to purchases made under the Right of Accumulation or a Letter of
Intent (see "Investment and Withdrawal Programs" in this SAI). A group might
qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because
the sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The commission
paid to the underwriter is the difference between the total amount invested
and the sum of (a) the net proceeds to the Fund and (b) the dealer commission.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the underwriter may vary and the total sales charge may
be more or less than the sales charge calculated using the sales charge
expressed as a percentage of the offering price or as a percentage of the net
amount invested as listed in the Prospectus. In the case of the maximum sales
charge the dealer retains 5% and MFD retains approximately 3/4 of 1% of the
public offering price. In addition, MFD pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described
in the Prospectus.
During the fiscal years ended November 30, 1997, 1996 and 1995, the CDSC
imposed on redemption of Class A shares was $161,446, $96,069 and $9,946,
respectively.
During the fiscal year ended November 30, 1997, MFD received sales charges of
$1,926,366 and dealers received sales charges of $14,555,567 (as their
concession on gross sales charges of $16,481,933) for selling Class A shares
of the Fund; the Fund received $1,174,986,121 representing the aggregate net
asset value of such shares. During the fiscal year ended November 30, 1996,
MFD received sales charges of $2,019,102 and dealers received sales charges of
$13,907,826 (as their concession on gross sales charges of $15,926,928) for
selling Class A shares of the Fund; the Fund received $1,027,927,978
representing the aggregate net asset value of such shares. During the fiscal
year ended November 30, 1995, MFD received sales charges of $1,055,053 and
dealers received sales charges of $9,137,371 (as their concession on gross
sales charges of $10,192,424) for selling Class A shares of the Fund; the Fund
received $460,963,288 representing the aggregate net asset value of such
shares.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES: MFD acts as agent in
selling Class B, Class C and Class I shares of the Fund. The public offering
price of Class B, Class C and Class I shares is their net asset value next
computed after the sale (see "Purchases" in the Prospectus and the Prospectus
Supplement pursuant to which Class I shares are offered).
During the fiscal years ended November 30, 1997, 1996 and 1995, the CDSC
imposed on redemption of Class B shares was $6,529,149, $3,455,966 and
$1,787,150, respectively. During the fiscal years ended November 30, 1997 and
1996, the CDSC imposed on redemption of Class C shares was $153,833 and
$25,307, respectively.
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers
loans from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers
for the purchase of Funds shares.
The Distribution Agreement will remain in effect until August 1, 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 Trust's shares (as defined in "Investment Restrictions") and in either
case, by a majority of the Trustees who are not parties to such Distribution
Agreement or interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days" nor less than 30 days"
notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser
or any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting broker-
dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the
value and quality of their brokerage services, and the level of their
brokerage commissions. In the case of securities, such as government
securities, which are principally traded in the over-the-counter market (where
no stated commissions are paid but the prices include a dealer's markup or
markdown), the Adviser normally seeks to deal directly with the primary market
makers, unless in its opinion, better prices are available elsewhere. In the
case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. Securities
firms or futures commission merchants may receive brokerage commissions on
transactions involving options, Futures Contracts and Options on Futures
Contracts and the purchase and sale of underlying securities upon exercise of
options. The brokerage commissions associated with buying and selling options
may be proportionately higher than those associated with general securities
transactions. From time to time, soliciting dealer fees are available to the
Adviser on the tender of the Fund's portfolio securities in so-called tender
or exchange offers. Such soliciting dealer fees are in effect recaptured for
the Fund by the Adviser. At present no other recapture arrangements are in
effect.
Under the Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the Adviser an
amount of commission for effecting a securities transaction for the Fund in
excess of the amount other broker-dealers would have charged for the
transaction if the Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and
research services provided by the executing broker-dealer viewed in terms of
either a particular transaction or the Adviser's overall responsibilities to
the Fund or to its other clients. Not all of such services are useful or of
value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts; and effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to
the availability of purchasers or sellers of securities and services in
effecting securities transactions and performing functions incidental thereto
such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold from time to time through such broker-dealers on behalf of
the Fund. The Trust's Trustees (together with the Trustees of the other MFS
Funds) have directed the Adviser to allocate a total of $54,160 of commission
business from the MFS Funds to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides
information useful to the Trustees in reviewing the relationship between the
Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality
of Research provided by brokers. Results of this effort are sometimes used by
the Adviser as a consideration in the selection of brokers to execute
portfolio transactions. However, the Adviser is unable to quantify the amount
of commissions which will be paid as a result of such Research because a
substantial number of transactions will be effected through brokers which
provide Research but which were selected principally because of their
execution capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To
the extent the Fund's portfolio transactions are used to obtain such services,
the brokerage commissions paid by the Fund will exceed those that might
otherwise be paid, by an amount which cannot be presently determined. Such
services would be useful and of value to the Adviser in serving both the Fund
and other clients and, conversely, such services obtained by the placement of
brokerage business of other clients would be useful to the Adviser in carrying
out its obligations to the Fund. While such services are not expected to
reduce the expenses of the Adviser, the Adviser would, through use of the
services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff.
For the Fund's fiscal year ended November 30, 1997, total brokerage
commissions of $3,165,127 were paid on total transactions (other than U.S.
Government securities, purchased options transactions and short-term
obligations) of $1,658,025,879. For the Fund's fiscal year ended November 30,
1996, total brokerage commissions of $2,492,577 were paid on total
transactions (other than U.S. Government securities, purchased options
transactions and short-term obligations) of $1,288,488,985. For the Fund's
fiscal year ended November 30, 1995, total brokerage commissions of $1,932,499
were paid on transactions (other than U.S. Government securities, purchased
options transactions and short-term obligations) of $935,882,443.
During the Fund's fiscal year ended November 30, 1997, the Fund owned
securities issued by General Electric Capital Corp. and Charles Schwab Corp.,
regular broker-dealers of the Fund, which securities had a value of
$57,910,000 and $1,446,094, respectively, at the end of such fiscal year.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or MFS or any subsidiary of MFS. Investment decisions for the Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Advisor to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, it is
believed that the Fund's ability to participate in volume transactions will
produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS: The Fund makes available the following
programs designed to enable shareholders to add to their investment or
withdraw from it with a minimum of paper work. These are described below and,
in certain cases, in the Prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $50,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any
of the classes of other MFS Funds or MFS Fixed Fund (a bank collective
investment fund) within a 13-month period (or 36-month period in the case of
purchases of $1 million or more), the shareholder may obtain Class A shares of
the Fund at the same reduced sales charge as though the total quantity were
invested in one lump sum by completing the Letter of Intent section of the
Account Application or filing a separate Letter of Intent application
(available from the Shareholder Servicing Agent) within 90 days of the
commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the
Letter of Intent application. The shareholder or his dealer must inform MFD
that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1
million or more) plus the value of shares credited toward completion of the
Letter of Intent do not total the sum specified, he will pay the increased
amount of the sales charge as described below. Instructions for issuance of
shares in the name of a person other than the person signing the Letter of
Intent application must be accompanied by a written statement from the dealer
stating that the shares were paid for by the person signing such Letter.
Neither income dividends not capital gain distributions taken in additional
shares will apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder
or to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable) the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released
by the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in
the premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of Class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed
Fund (a bank collective investment Fund), reaches a discount level. See
"Purchases" in the Prospectus for the sales charges on quantity purchases. For
example, if a shareholder owns shares with a current offering price value of
$37,500 and purchases an additional $12,500 of Class A shares of the Fund, the
sales charge for the $12,500 purchase would be at the rate of 4.75% (the rate
applicable to single transactions of $50,000). A shareholder must provide the
Shareholder Servicing Agent (or his investment dealer must provide MFD) with
information to verify that the quantity sales charge discount is applicable at
the time the investment is made.
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 net
asset value (exclusive of any sales charge) and will not be subject to any
CDSC. Distributions will be invested at the close of business on the payable
date for the distribution. A shareholder considering the Distribution
Investment Program should obtain and read the prospectus of the other fund and
consider the differences in objectives and policies before making any
investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments, based upon the value of his account. Each payment under a Systematic
Withdrawal Plan ("SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP generally are limited to 10% of the value of the
account at the time of the establishment of the SWP. SWP payments are drawn
from the proceeds of share redemptions (which would be a return of principal
and, if reflecting a gain, would be taxable). Redemptions of Class B and Class
C shares will be made in the following order: (i) any "Free Amount"; (ii) to
the extent necessary, any "Reinvested Shares"; and (iii) to the extent
necessary, the "Direct Purchase" subject to the lowest CDSC (as such terms are
defined in "Contingent Deferred Sales Charge" in the Prospectus). The CDSC
will be waived in the case of redemptions of Class B and Class C shares
pursuant to a SWP but will not be waived in the case of SWP redemptions of
Class A shares which are subject to a CDSC. To the extent that redemptions for
such periodic withdrawals exceed dividend income reinvested in the account,
such redemptions will reduce and may eventually exhaust the number of shares
in the shareholder's account. All dividend and capital gain distributions for
an account with a SWP will be received in full and fractional shares of the
Fund at the net asset value in effect at the close of business on the record
date for such distributions. To initiate this service, shares having an
aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, the Shareholder Servicing
Agent. With respect to Class A shares, maintaining a withdrawal plan
concurrently with an investment program would be disadvantageous because of
the sales charges included in share purchases and the imposition of a CDSC on
certain redemptions. The shareholder may deposit into the account additional
shares of the Fund, change the payee or change the amount of each payment. The
Shareholder Servicing Agent may charge the account for services rendered and
expenses incurred beyond those normally assumed by the Fund with respect to
the liquidation of shares. No charge is currently assessed against the
account, but one could be instituted by the Shareholder Servicing Agent on 60
days' notice in writing to the shareholder in the event that the Fund ceases
to assume the cost of these services. The Fund may terminate any SWP for an
account if the value of the account falls below $5,000 as a result of share
redemptions (other than as a result of a SWP) or an exchange of shares of the
Fund for shares of another MFS Fund. Any SWP may be terminated at any time by
either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be
made at any time by mailing a check payable to the Fund directly to the
Shareholder Servicing Agent. The shareholder's account number and the name of
his investment dealer must be included with each in-
vestment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or broker-
dealer, clients of an investment adviser or other similar groups; and (4)
agrees to provide certification of membership of those members investing money
in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund, may exchange their shares for the same class of other
MFS Funds (if available for sale) under the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
exchanges of funds from the shareholder's account in an MFS Fund for
investment in the same class of shares of other MFS Funds selected by the
shareholder. Under the Automatic Exchange Plan, exchanges of at least $50 each
may be made to up to six different funds effective on the seventh day of each
month or of every third month, depending whether monthly or quarterly
exchanges are elected by the shareholder. If the seventh day of the month is
not a business day, the transaction will be processed on the next business
day. Generally, the initial exchange will occur after receipt and processing
by the Shareholder Servicing Agent of an application in good order. Exchanges
will continue to be made from a shareholder's account in any MFS Fund, as long
as the balance of the account is sufficient to complete the exchanges.
Additional payments made to a shareholder's account will extend the period
that exchanges will continue to be made under the Automatic Exchange Plan.
However, if additional payments are added to an account subject to the
Automatic Exchange Plan shortly before an exchange is scheduled, such funds
may not be available for exchanges until the following month; therefore, care
should be used to avoid inadvertently terminating the Automatic Exchange Plan
through exhaustion of the account balance.
Exchanges will be charged in connection with the Automatic Exchange Plan.
However, exchanges of shares of MFS Money Market Fund, MFS Government Money
Market Fund and Class A shares of MFS Cash Reserve Fund will be subject to any
applicable sales charge. Changes in amounts to be exchanged to each fund, the
funds to which exchanges are to be made and the timing of exchanges (monthly
or quarterly), or termination of a shareholder's participation in the
Automatic Exchange Plan will be made after instructions in writing or by
telephone (an "Exchange Change Request") are received by the Shareholder
Servicing Agent in proper form (i.e., if in writing signed by the record
towner(s) exactly as shares are registered; if by telephone proper account
identification is given by the dealer or shareholder of record). Each Exchange
Change Request (other than termination of participation in the program) must
involve at least $50. Generally, if an Exchange Change Request is received by
telephone or in writing before the close of business on the last business day
of the month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds,
to make exchanges of shares from one MFS Fund to another and to withdraw from
an MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market
Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where
such shares are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and,
if applicable, with credit for any CDSC paid. In the case of proceeds
reinvested in MFS Money Market Fund, MFS Government Money Market Fund and
Class A shares of MFS Cash Reserve Fund, the shareholder has the right to
exchange the acquired shares for shares of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment must
be made within 90 days of the redemption and is limited to the amount of the
redemption proceeds. If the shares credited for any CDSC paid are then
redeemed within six years of the initial purchase in the case of Class B
shares or 12 months of the initial purchase in the case of Class C shares and
certain Class A shares, a CSDC will be imposed upon redemption. Although
redemptions and repurchases of shares are taxable events, a reinvestment
within a certain period of time in the same fund may be considered a "wash
sale" and may result in the inability to recognize currently all or a portion
of any loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE: Subject to the requirements set forth below, some or all
of the shares in an account for which payment has been received by the Fund
(i.e., an established account) may be exchanged for shares of the same class
of any of the other MFS Funds (if available for sale 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 an Exchange
Request is received by the Shareholder Servicing Agent prior to the close of
regular trading on the Exchange, the Exchange usually will occur on that day
if all of the requirements set forth above have been complied with at that
time. However, payment of the redemption proceeds by the Fund, and thus the
purchase of shares of the other MFS Fund, may be delayed for up to seven days
if the Fund determines that such a delay would be in the best interest of all
its shareholders. Investment dealers which have satisfied criteria established
by MFD may also communicate a shareholder's Exchange Request to the
Shareholder Servicing Agent by facsimile subject to the requirements set forth
above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for
the CDSC is carried forward to the exchanged shares. For purposes of
calculating the CDSC upon redemption of shares acquired in an exchange, the
purchase of shares acquired in one or more exchanges is deemed to have
occurred at the time of the original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other MFS Fund and consider the
differences in objectives and policies before making any exchange.
Shareholders of the other MFS Funds (except shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of Cash Reserve Fund for
shares acquired through direct purchase and dividends reinvested prior to June
1, 1992) have the right to exchange their shares for shares of the Fund,
subject to the conditions, if any, set forth in their respective prospectuses.
In addition, unitholders of the MFS Fixed Fund have the right to exchange
their units (except units acquired through direct purchases) for shares of the
Fund, subject to the conditions, if any, imposed upon such unitholders by the
MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents of
such states. Investors should consult with their own tax advisers to be sure
this is an appropriate investment based on their residency and each state's
income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued
and is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS: Shares of the Fund are available for
purchase by all types of tax-deferred retirement plans. MFD makes
available, through investment dealers, plans and/or custody agreements,
the following:
Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement program
and, if eligible, to receive a federal income tax deduction for amounts
contributed);
Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986 (the "Code"), as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested
automatically. For further details with respect to any plan, including fees
charged by the trustee, custodian or MFD, tax consequences and redemption
information, see the aspecific documents for that plan. Plan documents other
than those provided by MFD may be used to establish any of the plans described
above. Third party administrative services, available for some corporate
plans, may limit or delay the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code,
it is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and
any state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions
from net short-term capital gains are taxable to shareholders as ordinary
income for federal income tax purposes whether the distributions are paid in
cash or reinvested in additional shares. A portion of the Fund's ordinary
income dividends is normally eligible for the dividends received deduction for
corporations if the recipient otherwise qualifies for that deduction with
respect to its holding of Fund shares. Availability of the deduction for
particular corporate shareholders is subject to certain limitations and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the
excess of the 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 federal income tax purposes
without regard to the length of time the shareholders have held their 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 federal
tax status of its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as 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 18
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 followed by any purchase (including purchases by exchange or by
reinvestment) without payment of an additional sales charge of Class A shares
of the Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in 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.
The Fund's transactions in options, Futures Contracts and Forward Contracts
will be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example,
certain positions held by the Fund on the last business day of each taxable
year will be marked to market (i.e., treated as if closed out) on 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, Forward
Contracts, and Futures Contracts to the extent necessary to meet the
requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-
hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. The
Fund may elect to mark to market any investments in "passive foreign
investment companies" on the last day of each year. This election may cause
the Fund to recognize income prior to the receipt of cash payments with
respect to those investments; in order to distribute this income and avoid a
tax on the Fund, the Fund may be required to liquidate portfolio securities
that it might otherwise have continued to hold.
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 amount of the Fund's
assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% (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.
8. DETERMINATION OF NET ASSET VALUE; PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. As of the date of this SAI, the
Exchange is open for trading every weekday except for the following holidays
(or the days on which they are observed: New Year's Day, 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
during each such day as of the close of regular trading on the Exchange by
deducting the amount of the liabilities attributable to the class from the
value of the assets attributable to the class and dividing the difference by
the number of shares of the class outstanding. Forward Contracts will be
valued using a pricing model taking into consideration market data from an
external pricing source. Use of the pricing services has been approved by the
Board of Trustees. All other securities, futures contracts and options in the
Fund's portfolio (other than short-term obligations) for which the principal
market is one or more securities or commodities exchanges (whether domestic or
foreign) will be valued at the last reported sale price or at the settlement
price prior to the determination (or if there has been no current sale, at the
closing bid price) on the primary exchange on which such securities, Futures
Contracts or options are traded; but if a securities exchange is not the
principal market for securities, such securities will, if market quotations
are readily available, be valued at current bid prices, unless such securities
are reported on the NASDAQ system, in which case they are valued at the last
sale price or, if no sales occurred during the day, at the last quoted bid
price. Debt securities (other than short-term obligations but including listed
issues) in the Fund's portfolio are valued on the basis of valuations
furnished by a pricing service which utilizes both dealer-supplied valuations
and electronic data processing techniques which take into account appropriate
factors such as institutional-sized trading in similar groups of securities,
yields, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon quoted prices or
exchange or over-the-counter prices, since such valuations are believed to
reflect more accurately the fair value of such securities. Short-term
obligations, if any, in the Fund's portfolio are valued at amortized cost,
which constitutes fair value as determined by the Board of Trustees. Short-
term securities with a remaining maturity in excess of 60 days will be valued
based upon dealer supplied valuations. Portfolio securities and over-the-
counter options and Forward Contracts, for which there are no quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees. A share's net asset value is effective for
orders received by the dealer prior to its calculation and received by MFD, in
its capacity as the Fund's distributor or its agent, the Shareholder Servicing
Agent, prior to the close of the business day.
PERFORMANCE INFORMATION
The Fund will calculate its total rate of return for each class of shares for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (made with all
distributions reinvested and reflecting the CDSC or the maximum public
offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (5% maximum for Class B shares purchased on and after
January 1, 1993, but before September 1, 1993 and 4% maximum for Class B
shares and 1% maximum for Class C shares) and therefore may result in a higher
rate of return, (ii) a total rate of return assuming an initial account value
of $1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the sales charge (5.75% maximum) and/or
(iii) total rates of return which represent aggregate performance over a
period or year-by-year performance and which may or may not reflect the effect
of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered for
sale to, and purchased by, the public on different dates (the class
"inception" date). The calculation of total rate of return for a class of
shares which has a later class inception date than another class of shares of
the Fund is based both on (i) the performance of the Fund's newer class from
its inception date and (ii) the performance of the Fund's oldest class from
its inception date up to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares differ.
In calculating total rate of return for a newer class of shares in accordance
with certain formulas required by the SEC, the performance will be adjusted to
take into account the fact that the newer class is subject to a different
sales charge than the oldest class (e.g., if the newer class is Class A
shares, the total rate of return quoted will reflect the deduction of the
initial sales charge applicable to Class A shares; if the newer class is Class
B shares, the total rate of return quoted will reflect the deduction of the
CDSC applicable to Class B shares). However, the performance will not be
adjusted to take into account the fact that the newer class of shares bears
different class specific expenses than the oldest 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).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS -- The performance results presented in Appendix A
attached hereto under the heading "Performance Results" assume an initial
investment of $10,000 in Class B shares and cover the period from January 1,
1988 through December 31, 1997. It has been assumed that dividend and capital
gain distributions were reinvested in additional shares. Any performance
results or total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future
since the net asset value of shares of the Fund will vary based not only on
the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate total rates of return should be considered when
comparing the total rate of return of the Fund to total rates of return
published for other investment companies or other investment vehicles. Total
rate of return reflects the performance of both principal and income. Current
net asset value and account balance information may be obtained by calling
1-800-MFS-TALK (637-8255).
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 Saloman Bros. Indices, Ibbotson, Business
Week, Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Advisor, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual Funds
You Can Buy by Gordon K. Williamson, Consumer Price Index, and Sanford C.
Bernstein & Co. Fund performance may also be compared to the performance of
other mutual funds tracked by financial or business publications or
periodicals. The Fund may also quote evaluations mentioned in independent
radio or television broadcasts and may use charts and graphs to illustrate the
past performance of various indices such as those mentioned above and
illustrations using hypothetical rates of return to illustrate the effects of
compounding and tax-deferral. The Fund may advertise examples of the effects
of periodic investment plans, including the principle of dollar cost
averaging. In such a program, an investor invests a fixed dollar amount in a
fund at periodic intervals, thereby purchasing fewer shares when prices are
high and more shares when prices are low. While such a strategy does not
assure a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the Fund; the Fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment
and evaluation of credit, interest rate, market and economic risks and similar
or 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 ("Truth in Securities Act" or
"Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity
with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-
yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market-
value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993(R) -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest in companies deemed to be union-friendly
by an Advisory Board of senior labor officials, senior managers of
companies with significant labor contracts, academics and other national
labor leaders or experts.
9. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and
each respective class of shareholders. The provisions of the Distribution Plan
are severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the 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.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL
YEAR: During the fiscal year ended November 30, 1997, the Fund paid the
following Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
Class A Shares $ 7,774,642 $ 780,368 $6,994,274
Class B Shares $42,917,427 $33,687,363 $9,230,064
Class C Shares $ 2,228,591 $ 70,363 $2,158,228
GENERAL: The Distribution Plan 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 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 Distribution Plan entered into between the Fund or
MFD and other organizations must be approved by the Board of Trustees,
including a majority of the Distribution Plan Qualified Trustees. Agreements
under the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without payment
of any penalty, by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of
the Fund's shares. The Distribution Plan may not be amended to increase
materially the amount of permitted distribution expenses without the approval
of a majority of the respective class of the Fund's shares (as defined in
"Investment Restrictions") 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.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the Fund to issue an
unlimited number of full and fractional Shares of Beneficial Interest (without
par value) of one or more separate series and to divide or combine the shares
of any series into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in that series. The Trustees
have currently authorized shares of the Fund and three other series. The
Declaration of Trust further authorizes the Trustees to classify or reclassify
any series of shares into one or more classes. Pursuant thereto, the Trustees
have authorized the issuance of three classes of shares for this Fund, Class A
shares, Class B shares and Class C shares, as well as Class I shares for this
Fund. The two other series of the Trust have authorized the issuance of Class
A and Class B shares as well as 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 are entitled to share pro rata in the net assets of the Fund allocable
to such class available for distribution to shareholders. The Trust reserves
the right to create and issue additional series or classes of shares, in which
case the shares of each class would participate equally in the earnings,
dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees in accordance with the provisions of Section 16(c) of the 1940 Act.
No material amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the Trust's shares. Shares have no pre-
emptive or conversion rights (except as described in "Purchases -- Conversion
of Class B Shares" in the Prospectus). Shares are fully paid and non-
assessable. The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders
of two-thirds of the Trust's outstanding shares voting as a single class, or
of the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the affected
series' outstanding shares (as defined in "Investment Restrictions") will be
sufficient. The Trust or any series of the Trust may also be terminated (i)
upon liquidation and distribution of its assets, if approved by the vote of
the holders of two-thirds of its outstanding shares, or (ii) by the Trustees
by written notice to the shareholders of the Trust or the affected series. If
not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that it shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust, its shareholders, Trustees, officers,
employees and agents covering possible tort or other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
11. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance with tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
The Portfolio of Investments at November 30, 1997, the Statement of Assets and
Liabilities at November 30, 1997, the Statement of Operations for the year
ended November 30, 1997, the Statement of Changes in Net Assets for each of
the two years in the period ended November 30, 1997, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent auditors, as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below 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. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
<CAPTION>
PERFORMANCE RESULTS -- CLASS B SHARES
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- --------------- ------------- ---------- ------
<S> <C> <C> <C> <C>
December 31, 1988 $10,799 $ 0 $ 0 $10,799
December 31, 1989 13,704 0 0 13,704
December 31, 1990 13,356 0 0 13,356
December 31, 1991 23,982 1,076 0 25,058
December 31, 1992 26,521 1,472 1 27,994
December 31, 1993 31,999 2,525 195 34,719
December 31, 1994 32,852 2,887 370 36,109
December 31, 1995 46,017 4,044 519 50,580
December 31, 1996 52,069 4,928 587 57,584
December 31, 1997 61,860 6,389 698 68,947
Explanatory Notes: The results in the table assume that income dividends and capital gain distributions were invested in additional
shares. No adjustment has been made for income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of November 30, 1997.
AVERAGE ANNUAL TOTAL RETURNS
<CAPTION>
-----------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
------ ------ --------
<S> <C> <C> <C>
Class A Shares with sales charge ............................ 11.86% 20.56%(1) 23.10%(1)
Class A Shares without sales charge ......................... 18.66% 21.99%(1) 23.83%(1)
Class B Shares with CDSC .................................... 13.78% 20.99% 23.42%
Class B Shares without CDSC ................................. 17.78% 21.17% 23.42%
Class C Shares with CDSC .................................... 16.81% 21.18%(2) 23.42%(2)
Class C Shares without CDSC ................................. 17.81% 21.18%(2) 23.42%(2)
Class I Shares .............................................. 20.24%(3) 21.68%(3) 23.67%(3)
(1) Class A share performance includes the performance of the Fund's Class B shares for periods prior to the inception
of Class A shares on September 13, 1993. Sales charges, expenses and expense ratios, and therefore performance, for
Class A and Class B shares differ. Class A shares performance has been adjusted to reflect that Class A shares
generally are subject to an initial sales charge (unless the performance quotation does not give effect to the
initial sales charge) whereas Class B shares generally are subject to a CDSC. Class A share performance has not,
however, been adjusted to reflect differences in operating expenses (e.g., Rule 12b-1 fees), which generally are
higher for Class B shares.
(2) Class C share performance includes the performance of the Fund's Class B shares for the periods prior to the
inception of Class C shares on April 1, 1996. Sales charges, expenses and expense ratios, and therefore
performance, for Class B and Class C shares differ. Class C share performance has been adjusted to reflect that
Class C shares generally are subject to a lower CDSC (unless the performance quotation does not give effect to the
CDSC) than Class B shares. Class C share performance has not, however, been adjusted to reflect differences in
operating expenses which generally are not significantly different between Class B and Class C shares.
(3) Class I share performance includes the performance of the Fund's Class B shares for the periods prior to the
inception of Class I shares on January 2, 1997. Sales charges, expenses and expense ratios, and therefore
performance for Class I and B shares differ. Class I share performance has been adjusted to reflect that Class I
shares are not subject to a CDSC, whereas Class B shares generally are subject to a CDSC. Class I share performance
has not, however, been adjusted to reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class I shares.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
EMERGING
GROWTH
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[GRAPHIC OMITTED]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
Printed on recycled paper.
MEG-13-4/98/.8M 07/207/307
<PAGE>
MFS LARGE CAP GROWTH FUND
(FORMERLY KNOWN AS MFS CAPITAL GROWTH FUND)
SUPPLEMENT TO THE APRIL 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 APRIL 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
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................................................. 0.75%
Rule 12b-1 Fees................................................. None
Other Expenses(1)............................................... 0.29%
-----
Total Operating Expenses........................................ 1.04%
- -----------------
(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."
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........................................ $11
3 years....................................... 33
5 years....................................... 57
10 years...................................... 127
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.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in
conjunction with the financial statements included in the Fund's Annual Report
to Shareholders which are incorporated by reference into the SAI.
Financial Highlights - Class I Shares
PERIOD ENDED
NOVEMBER 30, 1997*
-----------------
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 13.99
-------
Income from investment operations # -
Net investment income $ 0.12
Net realized and unrealized gain
on investments and foreign currency transactions 3.30
-------
Total from investment operations $ 3.42
-------
Net asset value - end of period $ 17.41
-------
Total return 24.45%++
Ratios (to average net assets)/Supplemental data:
Expenses ## 1.07%+
Net investment income 0.90%+
Portfolio turnover 159%
Average Commission Rate $0.0372
Net assets at end of period
(000 omitted) $ 3
- --------------------------
* For the period from the inception of Class I shares, January 2, 1997
through November 30, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
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; and
(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.
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
Three classes of shares of the Fund currently are offered for sale, Class A
shares, Class B 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 and Class B 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 5.75% 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 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 I shares do not convert to any
other class of shares of the Fund.
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 and Class B shares because expenses
attributable to Class A shares and Class B shares generally will be higher.
THE DATE OF THIS SUPPLEMENT IS APRIL 1, 1998
<PAGE>
MFS(R) LARGE CAP GROWTH FUND
APRIL 1, 1998
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
This Prospectus pertains to MFS Large Cap Growth Fund (the "Fund"), a
diversified series of MFS Series Trust II (the "Trust"), an open-end
management investment company consisting of three series. The Fund's
investment objective is to provide growth of capital. THE FUND IS INTENDED FOR
INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT THE RISKS ENTAILED IN
SEEKING LONG-TERM GROWTH OF CAPITAL (see "Investment Objective and Policies").
The minimum initial investment generally is $1,000 per account (see
"Information Concerning Shares of the Fund -- Purchases"). The Fund's
investment adviser and distributor are Massachusetts Financial Services
Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc. ("MFD"),
respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
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.
This Prospectus sets forth concisely the information concerning the Trust and
Fund that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information dated April 1, 1998, as amended or
supplemented from time to time (the "SAI"), which contains more detailed
information about the Trust and the Fund and is incorporated into this
Prospectus by reference. See page 41 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
Page
1. Expense Summary ..................................... 3
2. The Fund ............................................ 4
3. Condensed Financial Information ..................... 5
4. Investment Objective and Policies ................... 9
5. Certain Securities and Investment Techniques ........ 9
6. Additional Risk Factors ............................. 16
7. Management of the Fund .............................. 21
8. Information Concerning Shares of the Fund ........... 22
Purchases ........................................ 22
Exchanges ........................................ 29
Redemptions and Repurchases ...................... 30
Distribution Plan ................................ 33
Distributions .................................... 35
Tax Status ....................................... 36
Net Asset Value .................................. 36
Description of Shares, Voting Rights and
Liabilities ................................... 37
Performance Information .......................... 37
9. Shareholder Services ................................ 38
Appendix A .......................................... A-1
Appendix B .......................................... B-1
Appendix C .......................................... C-1
<PAGE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B
------- -------
Maximum Initial Sales Charge Imposed on Purchases
of Fund Shares (as a percentage of offering
price) ......................................... 5.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) ............ See Below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees .................................. 0.75% 0.75%
Rule 12b-1 Fees .................................. 0.25%(2) 1.00%(3)
Other Expenses(4) ................................ 0.29% 0.29%
---- ----
Total Operating Expenses ......................... 1.29% 2.04%
- ------------
(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 ("a CDSC") of 1% will be imposed on such purchases in the
event of certain redemption transactions within 12 months following such
purchases. See "Information Concerning Shares of the Fund -- Purchases"
below.
(2) The Fund has adopted a distribution plan for its 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 the average daily net assets attributable to the Class A
shares. Payment of the 0.10% per annum Class A distribution fee will
commence on such date as the Trustees of the Trust may determine.
Distribution expenses paid under 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 1.00% per annum of the average daily net
assets attributable to Class B shares. Distribution expenses paid under the
Distribution Plan with respect to Class B shares, together with any CDSC
payable upon redemption of Class B shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge. 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."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B
- ------ ------- -----------------
(1)
1 year ...................................... $ 70 $ 61 $ 21
3 years ..................................... 96 94 64
5 years ..................................... 124 130 110
10 years ..................................... 204 217(2) 217(2)
- ------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear
directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e.,
distribution plan) fees -- "Distribution 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 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 three series of shares, each of which represents a portfolio with
separate investment objectives and policies. Shares of the Fund are
continuously sold to the public and the Fund then uses the proceeds to buy
securities for its portfolio. Two classes of shares of the Fund currently are
offered 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 5.75% of the
offering price (or a CDSC upon redemption of 1.00% during the first year in
the case of certain purchases of $1 million or more and certain purchases by
retirement plans) and are subject to an annual distribution fee and 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 a maximum of 1.00% per
annum. Class B shares will convert to Class A shares approximately eight years
after purchase. 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. The Adviser is responsible for the management of the Fund's assets
and the officers of the Trust are responsible for the Fund's operations. The
Adviser manages the portfolio from day to day in accordance with the Fund's
investment objective and policies. A majority of the Trustees are not
affiliated with the Adviser. The selection of investments and the way they are
managed depend on the conditions and trends in the economies of the various
countries of the world, their financial markets and the relationship of their
currencies to the U.S. dollar. The Fund also offers to buy back (redeem) its
shares from its shareholders at any time at net asset value, less any
applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI. This information is included in
reliance upon the report of the Fund's independent auditors given upon their
authority, as experts in accounting and auditing. The Fund's current
independent auditors are Deloitte & Touche LLP.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CLASS A SHARES
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993*
----- ----- ----- ----- -----
CLASS A
- -----------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period .... $18.02 $17.67 $13.49 $14.75 $14.58
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income ................... $ 0.03 $ 0.08 $ 0.11 $ 0.21 $ 0.03
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions .......................... 3.41 2.96 4.91 (0.25) 0.14
------ ------ ------ ------ ------
Total from investment operations .... $ 3.44 $ 3.04 $ 5.02 $(0.04) $ 0.17
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income .............. $ -- $(0.16) $(0.22) $(0.06) $ --
From net realized gain on investments and
foreign currency transactions ......... (4.10) (2.53) (0.62) (1.16) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ...................... $(4.10) $(2.69) $(0.84) $(1.22) $ --
------ ------ ------ ------ ------
Net asset value -- end of period .......... $17.36 $18.02 $17.67 $13.49 $14.75
====== ====== ====== ====== ======
Total return(+) ........................... 24.67% 19.76% 39.51% (0.47)% 5.01%+
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## .............................. 1.29% 1.31% 1.27% 1.12% 0.91%+
Net investment income ................... 0.22% 0.47% 0.67% 1.59% 1.67%+
PORTFOLIO TURNOVER ........................ 159% 112% 91% 50% 70%
AVERAGE COMMISSION RATE### ................ $ 0.0372 $ 0.0387 $ -- -- $ --
NET ASSETS AT END OF PERIOD (000 OMITTED) $219,755 $150,261 $88,119 $2,608 $ 196
- ----------
* For the period from the inception of Class A shares, September 7, 1993, through November 30, 1993.
+ Annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
### Average commission rate is calculated for funds with fiscal years on or after September 1, 1995.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS -- CONTINUED
CLASS B SHARES
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
CLASS B
- -----------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period $17.96 $17.56 $13.37 $14.72 $14.83
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income (loss) ....... $(0.08) $(0.06) $ 0.01 $ 0.04 $ 0.03
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ............ 3.40 2.97 4.85 (0.23) 0.50
------ ------ ------ ------ ------
Total from investment operations $ 3.32 $ 2.91 $ 4.86 $(0.19) $ 0.53
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ......... $ -- $ -- $(0.05) $ -- ** $(0.02)
From net realized gain on
investments and foreign currency
transactions ..................... (3.94) (2.51) (0.62) (1.16) (0.62)
------ ------ ------ ------ ------
Total distributions declared to
shareholders ................. $(3.94) $(2.51) $(0.67) $(1.16) $(0.64)
------ ------ ------ ------ ------
Net asset value -- end of period ..... $17.34 $17.96 $17.56 $13.37 $14.72
====== ====== ====== ====== ======
Total return ......................... 23.66% 18.84% 38.16% (1.52)% 3.70%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ......................... 2.05% 2.13% 2.14% 2.18% 2.15%
Net investment income (loss) ....... (0.51)% (0.38)% 0.08% 0.32% 0.10%
PORTFOLIO TURNOVER ................... 159% 112% 91% 50% 70%
AVERAGE COMMISSION RATE### ........... $ 0.0372 $ 0.0387 $ -- $ -- $ --
NET ASSETS AT END OF PERIOD
(000 OMITTED) ...................... $432,327 $430,936 $428,445 $384,504 $454,089
- ----------
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on or after September 1, 1995.
** The per share distribution from net investment income on Class B shares was $0.00312.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS -- CONTINUED
CLASS B SHARES
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------
1992 1991 1990 1989 1988
----- ----- ----- ------ -----
CLASS B
- ------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period $13.27 $11.29 $12.05 $ 9.38 $ 7.59
------ ------ ------ ------ ------
Income from investment operations --
Net investment income ............... $ 0.02 $ 0.10 $ 0.18 $ 0.17 $ 0.12
Net realized and unrealized gain
(loss) on
investments and foreign currency
transactions ...................... 2.61 2.15 (0.75) 2.63 1.76
------ ------ ------ ------ ------
Total from investment operations $ 2.63 $ 2.25 $(0.57) $ 2.80 $ 1.88
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income .......... $ -- $(0.14) $(0.19) $(0.13) $(0.09)
From net realized gain on investments
and foreign currency transactions . (1.07) (0.13) -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders .................. $(1.07) $(0.27) $(0.19) $(0.13) $(0.09)
------ ------ ------ ------ ------
Net asset value -- end of period ...... $14.83 $13.27 $11.29 $12.05 $ 9.38
====== ====== ====== ====== ======
Total return .......................... 20.61% 20.22% (4.80)% 30.11% 24.79%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ............................ 2.24% 2.28% 2.38% 2.46% 2.17%
Net investment income ............... 0.18% 0.75% 1.56% 1.56% 1.34%
PORTFOLIO TURNOVER .................... 65% 86% 68% 58% 93%
NET ASSETS AT END OF PERIOD
(000 OMITTED) ....................... $436,561 $317,375 $226,245 $202,861 $130,961
</TABLE>
<PAGE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund seeks to provide growth of capital. Dividend
income, if any, is a consideration incidental to the Fund's objective of
growth of capital.
INVESTMENT POLICIES -- The Fund seeks to achieve its objective by investing,
under normal market conditions, at least 65% of its total assets in equity
securities of companies with large market capitalization. These companies have
a market capitalization of at least $5 billion. Companies whose capitalization
falls below $5 billion after purchase continue to be considered large-
capitalization companies for purposes of this 65% investment policy.
Generally, emphasis is placed upon companies believed to possess above-average
growth opportunities rather than on companies with more mature growth trends.
While the policy of the Fund is to invest at least 65% of its total assets in
equity securities (see "Certain Securities and Investment Techniques -- Equity
Securities"), it may invest up to 35% of its total assets in other types of
securities such as fixed income securities, although 10% of the Fund's net
assets may be invested in lower-rated or unrated fixed-income securities. It
is contemplated that the Fund's non-convertible long-term debt investments
will consist primarily of "investment grade" securities (rated at least Baa by
Moody's Investors Service Inc. ("Moody's") or BBB by Standard & Poor's Ratings
Services ("S&P"), Duff & Phelps Credit Rating Co. ("Duff & Phelps") or Fitch
IBCA ("Fitch")). Securities rated BBB by S&P, Duff & Phelps or Fitch or Baa by
Moody's are considered to have speculative characteristics. Securities rated
BB by S&P, Duff & Phelps or Fitch or Ba by Moody's are considered speculative
and are commonly known as "junk bonds." (See "Additional Risk Factors --
Lower-Rated Fixed Income Securities" below for a further description of the
risks associated with investing in these securities.) For a description of
these ratings, see Appendix B to this Prospectus.
The Fund may also invest up to 25% (and expects generally to invest between 0%
to 20%) of its total assets in foreign securities (not including American
Depositary Receipts ("ADRs")), which are not traded on U.S. exchanges. See
"Additional Risk Factors -- Foreign Securities" below.
Cash, short-term obligations, repurchase agreements or other forms of debt
securities may be held by the Fund to provide a reserve for future purchases
of common stock or other securities. Subject to tax requirements, portfolio
changes are made without regard to the length of time a security has been
held, or whether a sale would result in a profit or loss.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following securities transactions and investment techniques,
many of which are described more fully in the SAI. See "Certain Securities and
Investment Techniques" in the SAI.
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference
stocks; securities such as bonds, warrants or rights that are convertible into
stocks; and depository receipts for those securities. These securities may be
listed on securities exchanges, traded in various over-the-counter markets or
have no organized markets.
LENDING OF SECURITIES -- The Fund may make loans of its portfolio securities.
Such loans will usually be made only to member banks of the Federal Reserve
System and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would continue to collect the
equivalent of the interest on the securities loaned and would also receive
either interest (through investment of cash collateral) or a fee (if the
collateral is U.S. Government securities or a letter of credit).
REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the
securities may be restricted (during which time the value of the securities
could decline). As discussed in the SAI, the Fund has adopted certain
procedures which are intended to minimize risk.
RESTRICTED SECURITIES -- The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act")
("restricted securities"), including those that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act ("Rule
144A securities"). A determination is made, based upon a continuing review of
the trading markets for the specific 144A security, whether such security is
liquid and thus not subject to the Fund's limitation on investing not more
than 15% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring liquidity of Rule 144A securities. The Board,
however, retains oversight of the liquidity determinations, focusing on
factors such as valuation, liquidity and availability of information.
Investing in Rule 144A securities could have the effect of decreasing the
level of liquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these 144A securities.
Subject to the Fund's 15% limitation on investments in illiquid investments,
the Fund may also invest in restricted securities that may not be sold under
Rule 144A, which presents certain risks. As a result, the Fund might not be
able to sell these securities when the Adviser wishes to do so, or might have
to sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, the judgment of the Adviser may at times play a
greater role in valuing these securities than in the case of unrestricted
securities.
WHEN-ISSUED SECURITIES -- In order to help ensure the availability of
suitable securities for its portfolio, the Fund may purchase securities on a
"when-issued" or on a "forward delivery" basis, which means that the
obligations will be delivered to the Fund at a future date usually beyond
customary settlement time. It is expected that, under normal circumstances,
the Fund will take delivery of such securities. In general, the Fund does not
pay for the securities until received and does not start earning interest on
the obligations until the contractual settlement date. While awaiting delivery
of the obligations purchased on such bases, the Fund will segregate liquid
assets sufficient to cover its commitments.
INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of unusual
market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of the Fund may be invested in
cash or cash equivalents including, but not limited to, obligations of banks
with assets of $1 billion or more (including certificates of deposit, bankers'
acceptances and repurchase agreements), commercial paper, short-term notes,
U.S. Government securities and related repurchase agreements. U.S. Government
securities also include interests in trusts or other entities representing
interests in obligations that are issued or guaranteed by the U.S. Government,
its agencies, authorities or instrumentalities. See Appendix C to this
Prospectus for a description of U.S. Government obligations and certain short-
term investments.
CORPORATE ASSET-BACKED SECURITIES -- The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or
automobile loan receivables, representing the obligations of a number of
different parties. Corporate asset-backed securities present certain risks.
For instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral.
LOANS AND OTHER DIRECT INDEBTEDNESS -- The Fund may invest a portion of its
assets in loans and other direct indebtedness. By purchasing a loan, the Fund
acquires some or all of the interest of a bank or other lending institution in
a loan to a corporate borrower. Many such loans are secured, and most impose
restrictive covenants which must be met by the borrower. These loans are made
generally to finance internal growth, mergers, acquisitions, stock
repurchases, leveraged buy-outs and other corporate activities. Such loans may
be in default at the time of purchase. The Fund may also purchase other direct
indebtedness such as trade or other claims against companies, which generally
represent money owed by the company to a supplier of goods and services. These
claims may also be purchased at a time when the company is in default. Certain
of the loans and other direct indebtedness acquired by the Fund may involve
revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans and other direct indebtedness
may make such loans especially vulnerable to adverse changes in economic or
market conditions. Loans and other direct indebtedness may not be in the form
of securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, the Fund may
be unable to sell such investments at an opportune time or may have to resell
them at less than fair market value. For a further discussion of loans, other
direct indebtedness and the risks related to transactions therein, see the
SAI.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low- to
middle-income economy according to the International Bank for Reconstruction
and Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets.
The Adviser determines whether an issuer's principal activities are located in
an emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source
of its revenues and location of its assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, 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.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually
a bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign
securities such as exchange rates and more limited information about foreign
issuers (see "Additional Risk Factors Foreign Securities" below).
INDEXED SECURITIES -- The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices, or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the 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.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS -- The Fund may enter
into transactions in options, futures and forward contracts on a variety of
instruments and indices, in order to protect against declines in the value of
portfolio securities or increases in the cost of securities or other assets to
be acquired and, subject to applicable law, to increase the Fund's gross
income. The types of instruments to be purchased and sold by the Fund are
described in the SAI, which should be read in conjunction with the following
section. In addition, the SAI contains a further discussion of the nature of
the transactions which may be entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES -- The Fund may write (sell) covered call and put
options and purchase call and put options on securities. The Fund will write
options on securities for the purpose of increasing its return on such
securities and/or to protect the value of its portfolio. In particular, where
the Fund writes an option which expires unexercised or is closed out by the
Fund at a profit, it will retain the premium paid for the option which will
increase its gross income and will offset in part the reduced value of the
portfolio security underlying the option, or the increased cost of portfolio
securities to be acquired. However, the writing of options constitutes only a
partial hedge, up to the amount of the premium, less any transaction costs. In
contrast, however, if the price of the underlying security moves adversely to
the Fund's position, the option may be exercised and the Fund will be required
to purchase or sell the underlying security at a disadvantageous price, which
may only be partially offset by the amount of the premium. The Fund may also
write combinations of put and call options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has
written call options.
The Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. In the
event that the expected market fluctuations occur, the Fund may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the options purchased. The premium paid for a put or call option plus
any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise or liquidation of the option, and, unless the price of the
underlying security changes sufficiently, the option may expire without value
to the Fund.
In certain instances, the Fund may enter into options on Treasury securities
which may be referred to as "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option.
OPTIONS ON STOCK INDICES -- The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. The Fund may write
options on stock indices for the purpose of increasing its gross income and to
protect its portfolio against declines in the value of securities it owns or
increases in the value of securities to be acquired. When the Fund writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Fund will either
close out the option at a profit or allow it to expire unexercised. The Fund
will thereby retain the amount of the premium, less related transaction costs,
which will increase its gross income and offset part of the reduced value of
portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse
price fluctuations, since any such fluctuations will be offset only to the
extent of the premium received by the Fund for the writing of the option, less
related transaction costs. In addition, if the value of an underlying index
moves adversely to the Fund's option position, the option may be exercised,
and the Fund will experience a loss which may only be partially offset by the
amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance.
The Fund's possible loss in either case will be limited to the premium paid
for the option, plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- The Fund may enter into stock index futures contracts.
(Unless otherwise specified, futures contracts on indices are referred to as
"Futures Contracts.") The Fund will utilize Futures Contracts for hedging and
non-hedging purposes, subject to applicable law. Purchases or sales of stock
index futures contracts for hedging purposes are used to attempt to protect
the Fund's current or intended stock investments from broad fluctuations in
stock prices. In the event that an anticipated decrease in the value of
portfolio securities occurs as a result of a general stock market decline, the
adverse effects of such changes may be offset, in whole or part, by gains on
the sale of Futures Contracts. Conversely, the increased cost of portfolio
securities to be acquired, caused by a general rise in the stock market, may
be offset, in whole or part, by gains on Futures Contracts purchased by the
Fund. The Fund will incur brokerage fees when it purchases and sells Futures
Contracts, and it will be required to make and maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS -- The Fund may purchase and write options on
stock index futures contracts. (Unless otherwise specified, options on stock
index futures contracts are referred to as "Options on Futures Contracts.")
Such investment strategies will be used for hedging and non-hedging purposes,
subject to applicable law. Put and call Options on Futures Contracts may be
traded by the Fund in order to protect against declines in the values of
portfolio securities or against increases in the cost of securities to be
acquired. Purchases of Options on Futures Contracts may present less risk in
hedging the 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 plus related transaction costs. The writing of such options, however,
does not present less risk than the trading of Futures Contracts and will
constitute only a partial hedge, up to the amount of the premium received. In
addition, if an option is exercised, the Fund may suffer a loss on the
transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY -- The Fund may enter into contracts
for the purchase or sale of a specific currency at a future date at a price
set at the time of the contract (a "Forward Contract"). The Fund will enter
into Forward Contracts for hedging and non-hedging purposes, including
transactions entered into for the purpose of profiting from anticipated
changes in foreign currency exchange rates. Transactions in Forward Contracts
entered into for hedging purposes may include forward purchases or sales of
foreign currencies for the purpose of protecting the dollar value of
securities denominated in a foreign currency or protecting the dollar
equivalent of interest or dividends to be paid on such securities. The Fund
may also enter into Forward Contracts for "cross hedging" purposes (e.g., the
purchase or sale of a Forward Contract on one type of currency as a hedge
against adverse fluctuations in the value of a second type of currency). By
entering into such transactions, however, the Fund may be required to forego
the benefits of advantageous changes in exchange rates. The Fund may also
enter into transactions in Forward Contracts for other than hedging purposes.
For example, if the Adviser believes that the value of a particular foreign
currency will increase or decrease relative to the value of the U.S. dollar,
the Fund may purchase or sell such currency, respectively, through a Forward
Contract. If the expected changes in the value of the currency occur, the Fund
will realize profits which will increase its gross income. Such transactions,
however, may be considered speculative and could involve significant risk of
loss, as set forth below. The Fund has established procedures which requires
use of segregated assets or "cover" in connection with the purchase and sale
of such Contracts.
Forward Contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves
certain risks beyond those associated with transactions in the Futures and
Options contracts described above.
OPTIONS ON FOREIGN CURRENCIES -- The Fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines
in the dollar value of portfolio securities, and against increases in the
dollar cost of securities to be acquired. As in the case of other types of
options, however, the writing of an option on foreign currency will constitute
only a partial hedge, up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the Fund's position,
it may forfeit the entire amount of the premium plus related transaction
costs. As in the case of Forward Contracts, certain options on foreign
currencies are traded over-the-counter and involve risks which may not be
present in the case of exchange-traded instruments.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Certain Securities and Investment Techniques" in the
SAI.
FIXED INCOME SECURITIES: The net asset value of the shares of an open-end
investment company which may invest to a limited extent in fixed income
securities changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected
to rise. Conversely, when interest rates rise, the value of a fixed income
portfolio can be expected to decline.
LOWER-RATED FIXED INCOME SECURITIES -- The Fund may invest up to 10% of its
net assets in lower-rated fixed income securities or comparable unrated
securities. Investments in lower-rated fixed income securities, while
generally providing greater income and opportunity for gain than investments
in higher rated securities, usually entail greater risk of principal and
income (including the possibility of default or bankruptcy of the issuers of
such securities), and involve greater volatility of price (especially during
periods of economic uncertainty or change) than investments in higher rated
securities and because yields may vary over time, no specified level of income
can ever be assured. In particular, securities rated lower than Baa by Moody's
or BBB by S&P, Duff & Phelps or Fitch or comparable unrated securities
(commonly known as "junk bonds") are considered speculative. These lower-rated
high yielding fixed income securities generally tend to reflect economic
changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates (although these lower-rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have under certain circumstances caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on the Fund's lower-rated high yielding fixed
income securities are paid primarily because of the increased risk of loss of
principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, the Fund may continue to earn the same
level of interest income while its net asset value declines due to portfolio
losses, which could result in an increase in the Fund's yield despite the
actual loss of principal. The prices for these securities may be affected by
legislative and regulatory developments. Changes in the value of securities
subsequent to their acquisition will not affect cash income or yield to
maturity to the Fund but will be reflected in the net asset value of shares of
the Fund. The market for these lower-rated fixed income securities may be less
liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower-rated securities may be affected by
the market's perception of their credit quality. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these
lower-rated securities at their fair value to meet redemption requests or to
respond to changes in the market. No minimum rating standard is required by
the Fund, although it is contemplated that the Fund's non-convertible long-
term debt investments will consist primarily of "investment grade" securities
(rated at least Baa by Moody's or BBB by S&P, Duff & Phelps or Fitch) (see
"Investment Objective and Policies" above). To the extent the Fund invests in
these lower-rated fixed income securities, the achievement of its investment
objective may be more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality bonds. While the Adviser may
refer to ratings issued by established credit rating agencies, it is not a
policy of the Fund to rely exclusively on ratings issued by these agencies,
but rather to supplement such ratings with the Adviser's own independent and
ongoing review of credit quality.
The Fund may also invest in fixed income securities rated Baa by Moody's or
BBB by S&P, Duff & Phelps or Fitch and comparable unrated securities. These
securities, while normally exhibiting adequate protection parameters, may have
speculative characteristics and changes in economic conditions and other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade fixed income
securities.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS -- Although the Fund will
enter into certain transactions in Futures Contracts, Options on Futures
Contracts, Forward Contracts and options for hedging purposes, such
transactions do involve certain risks. For example, a lack of correlation
between the index or instrument underlying an option, Futures Contract or
Forward Contract and the assets being hedged, or unexpected adverse price
movements, could render the Fund's hedging strategy unsuccessful and could
result in losses. "Cross hedging" transactions may involve greater correlation
risks. In addition, there can be no assurance that a liquid secondary market
will exist for any contract purchased or sold, and the Fund may be required to
maintain a position until exercise or expiration, which could result in
losses. As noted, the Fund may also enter into transactions in such
instruments (except for options on foreign currencies) for other than hedging
purposes (subject to applicable law), including speculative transactions,
which involve greater risk. In entering into such transactions, the Fund may
experience losses which are not offset by gains on other portfolio positions,
thereby reducing its gross income. In addition, the markets for such
instruments may be extremely volatile from time to time, as discussed in the
SAI, which could increase the risks incurred by the Fund in entering into such
transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S.
exchanges regulated by the Commodity Futures Trading Commission (the "CFTC")
and on foreign exchanges. The securities underlying options and Futures
Contracts traded by the Fund may include domestic as well as foreign
securities. Investors should recognize that transactions involving foreign
securities or foreign currencies, and transactions entered into in foreign
countries, may involve considerations and risks not typically associated with
investing in U.S. markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk
and could result in losses which are not offset by gains on other portfolio
assets. For example, the Fund may sell Futures Contracts on an index of
securities in order to profit from any anticipated decline in the value of the
securities comprising the underlying index. In such instances, any losses on
the Futures transaction will not be offset by gains on any portfolio
securities comprising such index, as might occur in connection with a hedging
transaction. The risks related to transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts entered into by the Fund
are set forth in greater detail in the SAI, which should be reviewed in
conjunction with the foregoing discussion.
FOREIGN SECURITIES: Investing in foreign securities or on foreign exchanges
may present a greater degree of risk than investing in domestic issuers. These
risks include changes in currency rates, exchange control regulations,
governmental administration, economic or monetary policy (in this country or
abroad), war or expropriation. In particular, the dollar value of portfolio
securities of non-U.S. issuers fluctuates with changes in market and economic
conditions abroad and with changes in relative currency values (when the value
of the dollar increases as compared to a foreign currency, the dollar value of
a foreign-denominated security decreases, and vice versa). Costs may be
incurred in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign
issuers, higher brokerage costs, different accounting standards and thinner
trading markets. Foreign securities markets may also be less liquid, more
volatile and less subject to government supervision than in the United States.
Investments in foreign countries could be affected by other factors including
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. Therefore, an
investment in shares of the Fund may be subject to a greater degree of risk
than investments in other investment companies which invest exclusively in
domestic securities.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of
such securities, in the foreign currencies in which such securities are
denominated. In that event, the Fund may promptly convert such currencies into
dollars at the then current exchange rate. Under certain circumstances,
however, such as where the Adviser believes that the applicable exchange rate
is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the
Fund may hold such currencies for an indefinite period of time.
In addition, the Fund may be required to receive delivery of the foreign
currency underlying forward foreign currency contracts it has entered into.
This could occur, for example, if an option written by the Fund is exercised
or the Fund is unable to close out a Forward Contract. The Fund may hold
foreign currency in anticipation of purchasing foreign securities. The Fund
may also elect to take delivery of the currencies underlying options or
Forward Contracts if, in the judgment of the Adviser, it is in the best
interest of the Fund to do so. In such instances as well, the Fund may
promptly convert the foreign currencies to dollars at the then current
exchange rate, or may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Fund
to risk of loss if such rates move in a direction adverse to the Fund's
position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities, and could
reduce the dollar value of interest of securities, and could reduce the dollar
value of interest or dividend payments received. In addition, the holding of
currencies could adversely affect the Fund's profit or loss on currency
options or Forward Contracts, as well as its hedging strategies.
EMERGING MARKET SECURITIES: The risks of investing in foreign securities may
be intensified in the case of investments in emerging markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund is uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to the Fund due to subsequent declines in value of the
portfolio security, a decrease in the level of liquidity in the Fund's
portfolio, or if the Fund has entered into a contract to sell the security, in
possible liability to the purchaser. Certain markets may require payment for
securities before delivery and in such markets the Fund bears the risk that
the securities will not be delivered and that the Fund's payments will not be
returned. Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the
greater uncertainties of investing in less established markets and economies.
In particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions
on foreign ownership, or prohibitions of repatriation of assets, and may have
less protection of property rights than more developed countries. The
economies of countries with emerging markets may be predominantly based on
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to
more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the
application to the Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls
may at times preclude investment in certain foreign emerging market debt
obligations and increase the expenses of the Fund.
PORTFOLIO TRADING
The Fund intends to manage its portfolio by buying and selling securities to
help attain its investment objective. The Fund will engage in portfolio
trading if it believes a transaction, net of costs (including custodian
charges), will help in attaining its investment objective (see "Portfolio
Transactions and Brokerage Commissions" in the SAI). For the fiscal year ended
November 30, 1997, the Fund had a portfolio turnover rate in excess of 100%.
Transaction costs incurred by the Fund and the realized capital gains and
losses of the Fund may be greater than that of a fund with a lesser portfolio
turnover rate.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the 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 other investment company clients of MFD,
the Fund's distributor, as a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions. From time to time, the Adviser may
direct certain portfolio transactions to broker-dealer firms which, in turn,
have agreed to pay a portion of the Fund's operating expenses (e.g., fees
charged by the custodian of the Fund's assets). For a further discussion of
portfolio trading, see the SAI.
--------------------
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). 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.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993 (the "Advisory Agreement"). Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Stephen Pesek, Jr., a Vice President of the Adviser, has
been the Fund's portfolio manager since June 1, 1997. Mr. Pesek has been
employed as a portfolio manager by the Adviser since 1994. From 1987 to 1994,
Mr. Pesek worked at Fidelity Research Corporation as an analyst. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For its services and facilities, the Adviser receives
a management fee, computed and paid monthly, in an amount equal to 0.75% of
the first $1 billion of the Fund's average daily net assets. Effective July 1,
1997, the Adviser has reduced its management fee to 0.65% per annum with
respect to any Fund assets in excess of $1 billion. This voluntary fee
reduction may be revised or rescinded by the Adviser only with the approval of
the Fund's Board of Trustees. For the Fund's fiscal year ended November 30,
1997, MFS received management fees under the Fund's Advisory Agreement of
$4,624,555.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Variable Insurance Trust, MFS/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"), ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Institutional Advisors,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts
Investors Trust. Net assets under the management of the MFS organization were
approximately $77.6 billion on behalf of approximately 2.9 million investor
accounts as of February 28, 1998. As of such date, the MFS organization
managed approximately $52.6 billion of assets invested in equity securities
and approximately $20.4 billion of assets invested in fixed income securities.
Approximately $4.0 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of
U.S. issuers. MFS is a subsidiary of Sun Life of Canada (U.S.) 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,
Chief Executive Officer 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.
W. Thomas London, Stephen E. Cavan, James R. Bordewick, Jr., Leslie J.
Nanberg, James O. Yost, Ellen Moynihan and Mark E. Bradley, 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 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.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A and B 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 and B 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
PERCENTAGE OF:
---------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ---------- -----------------
<S> <C> <C> <C>
Less than $50,000 .................................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000 ....................... 4.75 4.99 4.00
$100,000 but less than $250,000 ...................... 4.00 4.17 3.20
$250,000 but less than $500,000 ...................... 2.95 3.04 2.25
$500,000 but less than $1,000,000 .................... 2.20 2.25 1.70
$1,000,000 or more ................................... None** None** See Below**
- ------------
* Because of rounding in the calculation of offering price, actual sales charges may be more or less than those
calculated using the percentages above.
** A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the
sales charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge).
In the following 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 has 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 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:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares, 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 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:
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
First ........................................ 4%
Second ....................................... 4%
Third ........................................ 3%
Fourth ....................................... 3%
Fifth ........................................ 2%
Sixth ........................................ 1%
Seventh and following ........................ 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
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 Fund's 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 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 bears to the shareholder's total Class B shares not acquired
through reinvestment. The conversion of Class B shares to Class A shares is
subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversion will not constitute a
taxable event for federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class B shares would continue to be subject to higher expenses
than Class A shares for an indefinite period.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
GENERAL: The following information applies to purchases of both classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other
than IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and
the minimum additional investment is $50 per account. Accounts being
established for participation in the Automatic Exchange Plan are subject to a
$50 minimum on initial and additional investments per account. There are also
other limited exceptions to these minimums for certain tax-deferred retirement
programs. Any minimums may be changed at any time at the discretion of MFD.
The Fund reserves the right to cease offering its shares at any time.
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.
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 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. In the event that any individual or entity is determined
either by the Fund or MFD, in its sole discretion, to be a market timer with
respect to any calendar year, the Fund and/or MFD will reject all exchange
requests into the Fund during the remainder of that calendar year. Other funds
in the MFS Family of Funds may have different and/or more 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 and Class B shares. In addition, from time to
time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD,
at its expense, may provide additional commissions, compensation or
promotional incentives ("concessions") to dealers which sell 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.
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 shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth above in this paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund 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 in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone
redemption privilege must so elect on their Account Application, designate
thereon a bank and account number to receive the proceeds of such redemption,
and sign the Account Application Form with the signature(s) guaranteed in the
manner set forth below under the caption "Signature Guarantee." The proceeds
of such a redemption, reduced by the amount of any applicable CDSC and the
amount of any income tax required to be withheld, are mailed by check to the
designated account, without charge, if the redemption proceeds do not exceed
$1,000, and are wired in federal funds to the designated account if the
redemption proceeds exceed $1,000. If a telephone redemption request is
received by the Shareholder Servicing Agent by the close of regular trading on
the Exchange on any business day, shares will be redeemed at the closing net
asset value of the Fund on that day. Subject to the conditions described in
this section, proceeds of a redemption are normally mailed or wired on the
next business day following the date of receipt of the order for redemption.
The Shareholder Servicing Agent will not be responsible for any losses
resulting from unauthorized telephone transactions if it follows reasonable
procedures designed to verify the identity of the caller. The Shareholder
Servicing Agent will request personal or other information from the caller,
and will normally also record calls. Shareholders should verify the accuracy
of confirmation statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A 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 B shares purchased on or after January 1, 1993 will be aggregated on a
calendar month basis -- all transactions made during a calendar month,
regardless of when during the month they have occurred, will age one year at
the close of business on the last day of such month in the following calendar
year and each subsequent year. For Class B shares of the Fund purchased prior
to January 1, 1993, transactions will be aggregated on a calendar year basis
- -- all transactions made during a calendar year, regardless of when during the
year they have occurred, will age one year at the close of business business
on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed
without charge ("Free Amount"). Moreover, no CDSC is ever assessed on
additional shares acquired through the automatic reinvestment of dividends or
capital gain distributions ("Reinvested Shares"). Therefore, at the time of
redemption of a particular class, (i) any Free Amount is not subject to the
CDSC and (ii) the amount of the redemption equal to the then-current value of
Reinvested Shares is not subject to the CDSC, but (iii) any amount of the
redemption in excess of the aggregate of the then-current value of Reinvested
Shares and the Free Amount is subject to a CDSC. The CDSC will first be
applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to
all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. 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 and Class B 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.
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 certain 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 or Class
B shares, as appropriate) (the "Designated Class") annually in order that MFD
may pay expenses on behalf of the Fund relating to the servicing of shares of
the Designated Class. The service fee is used by MFD to compensate dealers
which enter into a sales agreement with MFD in consideration for all personal
services and/or account maintenance services rendered by the dealer with
respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date.
Service fees may be reduced for a dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having an aggregate net
asset value at or above a certain dollar level. Dealers may from time to time
be required to meet certain criteria in order to receive service fees. MFD or
its affiliates are entitled to retain all service fees payable under 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 performing services under its
distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The provisions of the Distribution Plan relating to operating policies
as well as initial approval, renewal, amendment and termination are
substantially identical as they relate to each class of shares covered by the
Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). 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).
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A and Class B
distribution and service fees for its current fiscal year are 0.25% and 1.00%
per annum, respectively. Payment of the 0.10% per annum Class A distribution
fee will commence on such date as the Trustees of the Trust may determine.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on an annual basis. In determining the net
investment income available for distributions, the Fund may rely on
projections of its anticipated net investment income over a longer term,
rather than its actual net investment income for the period. The Fund may make
one or more distributions during the calendar year to its shareholders from
any long-term capital gains, and may also make one or more distributions
during the calendar year to its shareholders from short-term capital gains.
Shareholders may elect to receive dividends and capital gain distributions in
either cash or additional shares of the same class with respect to which a
distribution is made. See "Tax Status" and "Shareholder Services --
Distribution Options" below. Distributions paid by the Fund with respect to
Class A shares will generally be greater than those paid with respect to Class
B shares because expenses attributable to Class B shares will generally be
higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (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. A portion of the dividends received from the Fund (but none of the
Fund's capital gain distributions) may qualify for the dividends received
deduction for corporations.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that 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), the portion, if any,
representing a return of capital (which is generally free of current taxes but
which results in a basis reduction) and the amount, if any, of federal income
tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (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
additional information regarding backup withholding of federal income tax and
should consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the
Fund's assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued on the basis of their current values or otherwise at their fair values,
as described in the SAI. All investments and assets are expressed in U.S.
dollars based upon current currency exchange rates. The net asset value of
each class of shares is effective for orders received by the dealer prior to
its calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has two classes of shares which it
offers to the general public, entitled Class A and Class B Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class
I Shares. The Trust has reserved the right to create and issue additional
classes and series of shares, in which case each class of shares of a series
would participate equally in the earnings, dividends and assets attributable
to that class of that particular series. Shareholders are entitled to one vote
for each share held and shares of each series would be entitled to vote
separately to approve investment advisory agreements or changes in investment
restrictions, but shares of all series would vote together in the election of
Trustees and selection of accountants. Additionally, each class of shares of a
series will vote separately on any material increases in the fees under 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 matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances (see "Description of Shares, Voting
Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above in "Purchases -- Conversion of Class B Shares"). Shares are
fully paid and non-assessable. Should the Fund be liquidated, shareholders of
each class are entitled to share pro rata in the net assets attributable to
that class available for distribution to shareholders. Shares will remain on
deposit with the Shareholder Servicing Agent and certificates will not be
issued except in connection with pledges and assignments and in certain other
limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed (e.g., fidelity bonding and errors and omissions
insurance) and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Securities
Corporation and Wiesenberger Investment Companies Service. Total rate of
return quotations will reflect the average annual percentage change over
stated periods in the value of an investment in a class of shares of the Fund
made at the maximum public offering price of shares of that class with all
distributions reinvested and which will give effect to the imposition of any
applicable CDSC assessed upon redemptions of the Fund's Class B 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
offers multiple classes of shares which were initially offered for sale to,
and purchased by, the public on different dates (the "class inception date").
The calculation of total rate of return for a class of shares which has a
later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class. See the SAI for further
information on the calculation of total rate of return for share classes with
different class inception dates.
The Fund's total rate of return quotations are based on historical performance
and are not intended to indicate future performance. Total rate of return
reflects all components of investment return over a stated period of time. The
Fund's quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders. For a discussion of the
manner in which the Fund will calculate its total rate of return, see the SAI.
For further information about the Fund's performance for the fiscal year ended
November 30, 1997, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number). In addition to
information provided in shareholder reports, the Fund may, in its discretion,
from time to time, make a list of all or a portion of its holdings available
to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At
the end of each calendar year, each shareholder will receive income tax
information regarding reportable dividends and capital gain distributions for
that year (see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Checks for dividends and capital
gain distributions in amounts less than $10 will automatically be reinvested
in additional shares of the Fund. If a shareholder has elected to receive
dividends and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record, 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 dividend or distribution. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders,
the Fund makes available the following programs designed to enable
shareholders to add to their investment in an account with the Fund or
withdraw from it with a minimum of paper work. The programs involve no extra
charge to shareholders (other than a sales charge in the case of certain Class
A share purchases) and may be changed or discontinued at any time by a
shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A
shares of the Fund alone or in combination with shares of any class of other
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-
month period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if
the intended purchases are not completed, by completing the Letter of Intent
section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, B and C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the
same class of another MFS Fund. Furthermore, distributions made by the Fund
may be automatically invested at net asset value in shares of the same class
of another MFS Fund, if shares of such Fund are available for sale (and
without any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan ("SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B shares in any year
pursuant to a SWP will not be subject to a CDSC and are generally limited to
10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account 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.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of the other MFS Funds under the Automatic Exchange Plan, a dollar cost
averaging program. The Automatic Exchange Plan provides for automatic monthly
or quarterly exchanges of funds from the shareholder's account in an MFS Fund
for investment in the same class of shares of other MFS Funds selected by the
shareholder if such fund is available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to 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 a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
--------------------
The Fund's SAI, dated April 1, 1998, as amended or supplemented from time to
time, contains more detailed information about the Trust and the Fund,
including, but not limited to, information related to (i) investment
objective, policies and restrictions, including the purchase and sale of
options, Futures Contracts, Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies, (ii) the Trustees, officers and investment
adviser, (iii) portfolio trading, (iv) the Fund's shares, including rights
and liabilities of shareholders, (v) tax status of dividends and
distributions, (vi) the Distribution Plan, (vii) the method used to calculate
total rate of return quotations and (viii) various services and privileges
provided by the Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares are waived
(Section II), and the CDSC for Class B shares are 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 institution having a selling agreement or
other similar 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 shares, as applicable, is
waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any Fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired employees)
and agents of MFS, Sun Life Assurance Company of Canada ("Sun Life")
or any of their subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the 401(a) or
ESP Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the 401(a) or ESP Plan
sponsor subscribes to the MFS FUNDamental 401(k) Plan or another
similar recordkeeping system made available by the Shareholder
Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the later
to occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP
Plan first invests its assets in one or more of the MFS Funds. The
sales charges will be waived in the case of a redemption of all of
the 401(a) or ESP Plan's shares in all MFS Funds (i.e., all the
assets of the 401(a) or ESP Plan invested in the MFS Funds are
withdrawn), unless immediately prior to the redemption, the aggregate
amount invested by the 401(a) or ESP Plan in shares of the MFS Funds
(excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) or ESP
Plan's assets in the MFS Funds, in which case the sales charges will
not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by 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
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to which
such Plan or its sponsoring organization subscribes to the MFS
FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program (but
not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the CDSC imposed on certain redemptions of Class A shares are
waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account
or a similar program under which such clients pay a fee to such
dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts whose third
party administrators or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o 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)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms acting
as trustee or manager for trust accounts which have entered into an
administrative services agreement with MFD and are acquiring such
shares for the benefits of their trust account clients.
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to 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
o Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of various debt instruments. It should be emphasized, however, that
ratings are not absolute standards of quality. Consequently, debt instruments
with the same maturity, coupon and rating may have different yields while debt
instruments of the same maturity and coupon with different ratings may have
the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
3. there is a lack of essential data pertaining to the issue or issuer;
and
4. the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS 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 rate "BB" is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated "B" is MORE VULNERABLE to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated "CCC" is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
advserse 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
categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA
AAA: Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
SPECULATIVE GRADE
BB: Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of
some kind appears probable. "C" ratings signal imminent default.
DDD, DD, D Default. 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 possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3 Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4 Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5 Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
APPENDIX C
DESCRIPTION OF OBLIGATIONS ISSUED
OR GUARANTEED BY U.S. GOVERNMENT AGENCIES,
AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities
of the U.S. Government are established under the authority of an act of
Congress and include, but are not limited to, the Tennessee Valley Authority,
the bank for Cooperatives, the Farmers Home Administration, Federal Home Loan
Banks, Federal Intermediate Credit Banks and Federal Land Banks, as well as
those listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS are bonds issued
by a cooperatively owned nationwide system of banks and associations
supervised by the Farm Credit Administration. These bonds are not guaranteed
by the U.S. Government.
MARITIME ADMINISTRATION BONDS are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which
represent a partial ownership interest in a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations. Each mortgage loan included in the pool is also insured or
guaranteed by the Federal Housing Administration, the Veterans Administration
or the Farmers Home Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS are bonds issued and guaranteed
by the Federal Home Loan Mortgage Corporation and are not guaranteed by the
U.S. Government.
FEDERAL HOME LOAN BANK BONDS are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S.Government.
FINANCING CORPORATION BONDS AND NOTES are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS are bonds issued and guaranteed by
the Federal National Mortgage Association and are not guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES are debentures backed by the
Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-
through certificates, are supported by the full faith and credit of the U.S.
Government; others, such as securities of FNMA, by the right of the issuer to
borrow from the U.S. Treasury; still others, such as bonds issued by SLMA, are
supported only by the credit of the instrumentality. No assurance can be given
that the U.S. Government will provide financial support to instrumentalities
sponsored by the U.S. Government as it is not obligated by law, in certain
instances, to do so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the
Fund intends to invest, the Fund may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN
U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in
a bank (including eligible foreign branches of U.S. banks), for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER refers to promissory notes issued by corporations in order to
finance their short-term credit needs.
CORPORATE OBLIGATIONS include bonds and notes issued by corporations in order
to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P or Fitch and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P or
Fitch, and issues so rated are regarded as having the greatest capacity for
timely payment. Issues in the "A" category are delineated with the numbers 1,
2 and 3 to indicate the relative degree of safety. The A-1 designation
indicates that the degree of safety regarding timely payment is either
overwhelming or very strong. Those A-1 issues determined to possess
overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structure with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial markets
and assured sources of alternate liquidity.
<PAGE>
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Principal Underwriter
MFS Fund Distributrs, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend
Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
MLC-1-4/98/294M 03/203
<PAGE>
[Logo]
INVESTMENT MANAGEMENT
MFS(R) LARGE CAP STATEMENT OF
GROWTH FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) April 1, 1998
- --------------------------------------------------------------------------------
Page
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1. Definitions .......................................................... 2
2. Certain Securities and Investment Techniques ......................... 2
3. Investment Restrictions .............................................. 11
4. Management of the Fund ............................................... 13
Trustees .......................................................... 13
Officers .......................................................... 13
Trustee Compensation Table ........................................ 14
Investment Adviser ................................................ 14
Administrator ..................................................... 15
Custodian ......................................................... 15
Shareholder Servicing Agent ....................................... 15
Distributor ....................................................... 15
5. Portfolio Transactions and Brokerage Commissions ..................... 16
6. Shareholder Services ................................................. 17
Investment and Withdrawal Programs ................................ 17
Exchange Privilege ................................................ 19
Tax-Deferred Retirement Plans ..................................... 20
7. Tax Status ........................................................... 20
8. Determination of Net Asset Value; Performance Information ............ 21
9. Distribution Plan .................................................... 23
10. Description of Shares, Voting Rights and Liabilities ................. 24
11. Independent Auditors and Financial Statements ........................ 24
Appendix A ........................................................... A-1
MFS LARGE CAP GROWTH FUND
A Series of MFS Series Trust II
500 Boylston Street, Boston, Massachusetts 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 April 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 Large Cap Growth Fund, a
diversified series of MFS
Series Trust II, (the
"Trust"), a Massachusetts
business trust. The Fund was
known as MFS Capital Growth
Fund from June 3, 1993 until
August 30, 1997, MFS Lifetime
Capital Growth Fund from
August 3, 1992 until June 3,
1993 and was known as
Lifetime Capital Growth Trust
prior to August 3, 1992. The
Fund became a series of the
Trust on June 3, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated April 1, 1998, as
amended or supplemented from
time to time.
2. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment techniques and securities
transactions are described in greater detail below.
LENDING OF SECURITIES
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would have the right to call a loan
and obtain the securities loaned at any time on customary industry settlement
notice (which will usually not exceed five days). During the existence of a
loan, the Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned. The Fund would also
receive a fee from the borrower or 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 fail financially. However, the loans would be
made only to firms deemed by the Adviser to be of good standing, and when, in
the judgment of the Adviser, the consideration which could be earned currently
from securities loans of this type justifies the attendant risk. If the
Adviser determines to make securities loans, it is not intended that the value
of the securities loaned would exceed 20% of the value of the Fund's total
assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have 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 policies
promulgated by the SEC, purchases of securities on such basis may involve more
risk than other types of purchases. For example, the Fund may have to sell
assets which have been set aside in order to meet redemptions. Also, if the
Fund determines it is necessary to sell the "when-issued" or "forward
delivery" securities before delivery, it may incur a loss because of market
fluctuations since the time the commitment to purchase such securities was
made. When the time comes to pay for "when-issued" or "forward delivery"
securities, the Fund will meet its obligations from the then-available cash
flow on the sale of securities, or, although it would not normally expect to
do so, from the sale of the "when-issued" or "forward delivery" securities
themselves (which may have a value greater or less than the Fund's payment
obligation).
CORPORATE ASSET-BACKED SECURITIES
As described in the Prospectus, the Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers
to retain possession of the underlying obligations. If the servicer were to
sell these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
The underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities weighted average life and may lower their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures payment through insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties. The Fund will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
or failure of the credit support could adversely affect the return on an
investment in such a security.
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund may enter into repurchase agreements
with sellers who are member firms (or subsidiaries thereof) of the Exchange,
members of the Federal Reserve System, or recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that the Fund purchases and holds
through its agent are U.S. Government securities, the values, including
accrued interest, of which are equal to or greater than the repurchase price
agreed to be paid by the seller. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a standard rate due to the
Fund together with the repurchase price on repurchase. In either case, the
income to the Fund is unrelated to the interest rate on the U.S. Government
securities.
The repurchase agreement provides that in the event the seller fails to pay
the 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 the
seller's creditworthiness on an ongoing basis. Moreover, under such
agreements, the value, including accrued interest, of the securities (which
are marked to market every business day) is required to be greater than the
repurchase price, and the Fund has the right to make margin calls at any time
if the value of the securities falls below the agreed upon collateral.
LOANS AND OTHER DIRECT INDEBTEDNESS
As described in the Prospectus, the Fund may purchase loans and other direct
indebtedness. In purchasing a loan, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, although some may be unsecured. Such
loans may be in default at the time of purchase. Loans and other direct
indebtedness that are fully secured offer the Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a
secured loan or other direct indebtedness would satisfy the corporate
borrower's obligation, or that the collateral can be liquidated.
These loans and other direct indebtedness are made generally to finance
internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs
and other corporate activities. Such loans and other direct indebtedness loans
are typically made by a syndicate of lending institutions, represented by an
agent lending institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts due on its
own behalf and on behalf of the others in the syndicate, and for enforcing its
and their other rights against the borrower. Alternatively, such loans and
other direct indebtedness may be structured as a novation, pursuant to which
the Fund would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Fund would purchase an assignment
of a portion of a lender's interest in a loan or other direct indebtedness
either directly from the lender or through an intermediary. The Fund may also
purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods or services. These claims may
also be purchased at a time when the company is in default.
Certain of the loans and other direct indebtedness acquired by the Fund may
involve revolving credit facilities or other standby financing commitments
which obligate the Fund to pay additional cash on a certain date or on demand.
These commitments may have the effect of requiring the Fund to increase its
investment in a company at a time when the Fund might not otherwise decide to
do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that the Fund is
committed to advance additional funds, it will at all times hold and maintain
in a segregated account liquid assets in an amount sufficient to meet such
commitments.
The Fund's ability to receive payment of principal, interest and other amounts
due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loans and other direct
indebtedness which the Fund will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower.
As the Fund may be required to rely upon another lending institution to
collect and pass on to the Fund amounts payable with respect to the loan and
to enforce the Fund's rights under the loan and other direct indebtedness, an
insolvency, bankruptcy or reorganization of the lending institution may delay
or prevent the Fund from receiving such amounts. In such cases, the Fund will
evaluate as well the creditworthiness of the lending institution and will
treat both the borrower and the lending institution as an "issuer" of the loan
for purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged
nature of many such loans and other direct indebtedness may make such loans
and other direct indebtedness especially vulnerable to adverse changes in
economic or market conditions. Investments in such loans and other direct
indebtedness may involve additional risk to the Fund. For example, if a loan
or other direct indebtedness is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the Fund could be held
liable. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Adviser's
research in an attempt to avoid situations where fraud and misrepresentation
could adversely affect the Fund. In addition, loans and other direct
investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market
value. To the extent that the Adviser determines that any such investments are
illiquid, the Fund will include them in the investment limitations described
below.
FOREIGN SECURITIES
The Fund may invest up to 25% (and generally expects to invest between 0% and
20%) of its total assets in foreign securities which are not traded on a U.S.
exchange (not including American Depositary Receipts ("ADRs")). As discussed
in the Prospectus, investing in foreign securities generally presents a
greater degree of risk than investing in domestic securities due to possible
exchange rate fluctuations, less publicly available information, more volatile
markets, less securities regulation, less favorable tax provisions, war or
expropriation. As a result of its investments in foreign securities, the Fund
may receive interest or dividend payments, or the proceeds of the sale or
redemption of such securities, in the foreign currencies in which such
securities are denominated. Under certain circumstances, such as where the
Adviser believes that the applicable exchange rate is unfavorable at the time
the currencies are received or the Adviser anticipates, for any other reason,
that the exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. The Fund may also hold foreign currency in
anticipation of purchasing foreign securities. While the holding of currencies
will permit the Fund to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Fund to risk of loss
if exchange rates move in a direction adverse to the Fund's position. Such
losses could reduce any profits or increase any losses sustained by the Fund
from the sale or redemption of securities and could reduce the dollar value of
interest or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS
The Fund may invest in ADRs which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. ADRs may be
sponsored or unsponsored. A sponsored ADR is issued by a depository which has
an exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. Under the
terms of most sponsored arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities. The depository of an unsponsored ADR, on
the other hand, is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass
through voting rights to ADR holders in respect of the deposited securities.
The Fund may invest in either type of ADR. Although the U.S. investor holds a
substitute receipt of ownership rather than direct stock certificates, the use
of the depository receipts in the United States can reduce costs and delays as
well as potential currency exchange and other difficulties. The Fund may
purchase securities in local markets and direct delivery of these ordinary
shares to the local depository of an ADR agent bank in the foreign country.
Simultaneously, the ADR agents create a certificate which settles at the
Fund's custodian in five days. The Fund may also execute trades on the U.S.
markets using existing ADRs. A foreign issuer of the security underlying an
ADR is generally not subject to the same reporting requirements in the United
States as a domestic issuer. Accordingly the information available to a U.S.
investor will be limited to the information the foreign issuer is required to
disclose in its own country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are traded in foreign currency.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may write
covered call and put options and purchase call and put options on securities.
Call and put options written by the Fund may be covered in the manner set
forth below.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration segregated by the Fund) 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 are
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 is equal to or greater than
the exercise price of the put written or where the exercise price of the put
held is less than the exercise price of the put written if liquid assets
representing the difference are segregated by the Fund. Put and call options
written by the Fund may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counterparty
with which, the option is traded, and applicable laws and regulations. If the
writer's obligation is not so covered, it is subject to the risk of the full
change in value of the underlying security from the time the option is written
until exercise.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case
of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by liquid assets. Such
transactions permit the Fund to generate additional premium income, which will
partially offset declines in the value of portfolio securities or increases in
the cost of securities to be acquired. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other investments of the Fund, provided
that another option on such security is not written. If the Fund desires to
sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction in connection with the option
prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the premium paid
in connection with the closing of an option written by the Fund is less than
the premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than
the premium paid for the original purchase. Conversely, the Fund will suffer a
loss if the premium paid or received in connection with a closing transaction
is more or less, respectively, than the premium received or paid in
establishing the option position. Because increases in the market price of a
call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option
previously written by the Fund is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of
the underlying security will decline moderately during the option period. Buy-
and-write transactions using out-of-the-money call options may be used when it
is expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such transactions, the
Fund's maximum gain will be the premium received by it for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price, less related transaction costs.
If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by
the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the
premium received, less related transaction costs. If the market price of the
underlying security declines or otherwise is below the exercise price, the
Fund may elect to close the position or retain the option until it is
exercised, at which time the Fund will be required to take delivery of the
security at the exercise price; the Fund's return will be the premium received
from the put option minus the amount by which the market price of the security
is below the exercise price, which could result in a loss. Out-of-the-money,
at-the-money and in-the-money put options may be used by the Fund in the same
market environments that call options are used in equivalent buy-and-write
transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs,
the call will likely be exercised and the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be
effective, therefore, only where the price of the security remains stable and
neither the call nor the put is exercised. In those instances where one of the
options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, the Fund assumes the risk that
it may be required to purchase the underlying security for an exercise price
above its then current market value, resulting in a capital loss unless the
security subsequently appreciates in value. The writing of options on
securities will not be undertaken by the Fund solely for hedging purposes, and
could involve certain risks which are not present in the case of hedging
transactions. Moreover, even where options are written for hedging purposes,
such transactions constitute only a partial hedge against declines in the
value of portfolio securities or against increases in the value of securities
to be acquired, up to the amount of the premium.
The Fund may purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, the Fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of
the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price
of securities that the Fund anticipates purchasing in the future. If such
increase occurs, the call option will permit the Fund to purchase the
securities at the exercise price, or to close out the options at a profit. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
In certain instances, the Fund may enter into options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of
each such option. Like other types of options, these transactions, which may
be referred to as "reset" options or "adjustable strike" options, grant the
purchaser the right to purchase (in the case of a "call") or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of options, however, the price at which the underlying
security may be purchased or sold under a "reset" option is determined at
various intervals during the term of the option, and such price fluctuates
from interval to interval based on changes in the market value of the
underlying security. As a result, the strike price of a "reset" option, at the
time of exercise, may be less advantageous to the Fund than if the strike
price had been fixed at the initiation of the option. In addition, the premium
paid for the purchase of the option may be determined at the termination,
rather than the initiation, of the option. If the premium is paid at
termination, the Fund assumes the risk that (i) the premium may be less than
the premium which would otherwise have been received at the initiation of the
option because of such factors as the volatility in yield of the underlying
Treasury security over the term of the option and adjustments made to the
strike price of the option, and (ii) the option purchaser may default on its
obligation to pay the premium at the termination of the option.
OPTIONS ON STOCK INDICES -- As noted in the Prospectus, the Fund may write
(sell) covered call and put options and purchase call and put options on stock
indices. In contrast to an option on a security, an option on a stock index
provides the holder with the right but not the obligation to make or receive a
cash settlement upon exercise of the option, rather than the right to purchase
or sell a security. The amount of this settlement is equal to (i) the amount,
if any, by which the fixed exercise price of the option exceeds (in the case
of a call) or is below (in the case of a put) the closing value of the
underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier."
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for
additional cash consideration by the Fund) 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 are segregated by the Fund. The Fund may cover put options on stock
indices by segregating liquid assets with a value equal to the exercise price,
or by holding a put on the same stock index and in the same principal amount
as the put written where the exercise price of the put held is equal to or
greater than the exercise price of the put written or where the exercise price
of the put held is less than the exercise price of the put written if liquid
assets representing the difference are segregated by the Fund. Put and call
options on stock indices may also be covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty with
which, the option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised
or is closed out at a profit. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a
profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investments. By writing a put option, the
Fund assumes the risk of a decline in the index. To the extent that the price
changes of securities owned by the Fund correlate with changes in the value of
the index, writing covered put options on indices will increase the Fund's
losses in the event of a market decline, although such losses will be offset
in part by the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, the Fund will seek to offset a decline in the value of securities it
owns through appreciation of the put option. If the value of the Fund's
investments does not decline as anticipated, or if the value of the option
does not increase, the Fund's loss will be limited to the premium paid for the
option plus related transaction costs. The success of this strategy will
largely depend on the accuracy of the correlation between the changes in value
of the index and the changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to
attempt to reduce the risk of missing a broad market advance, or an advance in
an industry or market segment, at a time when the Fund holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call
options for this purpose, the Fund will also bear the risk of losing all or a
portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when the Fund is substantially fully
invested is a form of leverage, up to the amount of the premium and related
transaction costs, and involves risks of loss and of increased volatility
similar to those involved in purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index, such
as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
Index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based on narrower
market indices, such as the Standard & Poor's 100 Index, or on indices of
securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market
values of the stocks so included. The composition of the index is changed
periodically.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may enter into stock
index futures contracts. (Unless otherwise specified, futures contracts on
indices are referred to as "Futures Contracts.") Such investment strategies
will be used for hedging purposes and for non-hedging purposes, subject to
applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument, or for the
making and acceptance of a cash settlement, at a stated time in the future for
a fixed price. By its terms, a Futures Contract provides for a specified
settlement date on which, in the case of stock index futures contracts, the
difference between the price at which the contract was entered into and the
contract's closing value is settled between the purchaser and seller in cash.
Futures Contracts differ from options in that they are bilateral agreements,
with both the purchaser and the seller equally obligated to complete the
transaction. Futures Contracts call for settlement only on the expiration date
and cannot be "exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale
of a security or the purchase of an option in that no purchase price is paid
or received. Instead, an amount of cash or cash equivalents, which varies but
may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the
broker, referred to as "variation margin," are made on a daily basis as the
value of the index or instrument underlying the Futures Contract fluctuates,
making positions in the Futures Contract more or less valuable -- a process
known as "marking to the market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Fund's current or intended stock investments from broad
fluctuations in stock prices. For example, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of the Fund's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or part, by gains on the futures position.
When the Fund is not fully invested in the securities market and anticipates a
significant market advance, it may purchase stock index futures contracts in
order to gain rapid market exposure that may, in part or entirely, offset
increases in the cost of securities that the Fund intends to purchase. As such
purchases are made, the corresponding positions in stock index futures
contracts will be closed out. In a substantial majority of these transactions,
the Fund will purchase such securities upon termination of the futures
position, but under unusual market conditions, a long futures position may be
terminated without a related purchase of securities.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may
purchase and write options to buy or sell Futures Contracts in which it may
invest ("Options on Futures Contracts"). Such investment strategies will be
used for hedging purposes and for non-hedging purposes, subject to applicable
law.
An Option on a Futures Contract provides the holder with the right to enter
into a "long" position in the underlying Futures Contract, in the case of a
call option, or a "short" position in the underlying Futures Contract, in the
case of a put option, at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Upon exercise of the option
by the holder, the contract market clearinghouse establishes a corresponding
short position for the writer of the option, in the case of a call option, or
a corresponding long position in the case of a put option. In the event that
an option is exercised, the parties will be subject to all the risks
associated with the trading of Futures Contracts, such as payment of initial
and variation margin deposits. In addition, the writer of an Option on a
Futures Contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or
sold. The difference between the premiums paid and received represents the
Fund's profit or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodities Futures Trading Commission ("CFTC") and the performance guarantee
of the exchange clearinghouse. In addition, Options on Futures Contracts may
be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures Contracts (a)
through purchases of the underlying Futures Contract, (b) through ownership of
the instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract
and in the same principal amount as the call written where the exercise price
of the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if
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 where the exercise price of the put held is less than the exercise price of
the put written if liquid assets representing the difference is segregated by
the Fund. Put and call Options on Futures Contracts may also be covered in
such other manner as may be in accordance with the rules of the exchange on
which the option is traded and applicable laws and regulations. Upon the
exercise of a call Option on a Futures Contract written by the Fund, the Fund
will be required to sell the underlying Futures Contract which, if the Fund
has covered its obligation through the purchase of such Contract, will serve
to liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by the Fund is exercised, the Fund will be required to
purchase the underlying Futures Contract which, if the Fund has covered its
obligation through the sale of such Contract, will close out its futures
position.
The writing of a call Option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or
other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
less related transaction costs, which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing
of a put Option on a Futures Contract constitutes a partial hedge against
increasing prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and the changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes
instead of purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated
as a result of a projected market-wide decline or changes in interest or
exchange rates, the Fund could, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease occurs, it may be offset,
in whole or part, by a profit on the option. Conversely, where it is projected
that the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates,
the Fund could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward foreign currency
exchange contracts ("Forward Contracts") for hedging purposes and non-hedging
purposes. Forward Contracts may be used for hedging to attempt to minimize the
risk to the Fund from adverse changes in the relationship between the U.S.
dollar and foreign currencies. The Fund intends to enter into Forward
Contracts for hedging purposes. In particular, a Forward Contract to sell a
currency may be entered into where the Fund seeks to protect against an
anticipated increase in the exchange rate for a specific currency which could
reduce the dollar value of portfolio securities denominated in such currency.
Conversely, the Fund may enter into a Forward Contract to purchase a given
currency to protect against a projected increase in the dollar value of
securities denominated in such currency which the Fund intends to acquire. The
Fund also may enter into a Forward Contract in order to assure itself of a
predetermined exchange rate in connection with a security denominated in a
foreign currency. In addition, the Fund may enter into Forward Contracts for
"cross hedging" purposes; e.g., the purchase or sale of a Forward Contract on
one type of currency as a hedge against adverse fluctuations in the value of a
second type of currency.
If a hedging transaction in Forward Contracts is successful, the decline in
the value of portfolio securities or other assets or the increase in the cost
of securities or other assets to be acquired may be offset, at least in part,
by profits on the Forward Contract. Nevertheless, by entering into such
Forward Contracts, the Fund may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable movements in
exchange rates. But, the Fund will usually seek to close out positions in such
Contracts by entering into offsetting transactions, which will serve to fix
the Fund's profit or loss based upon the value of the contracts at the time
the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other than
hedging purposes, which present greater profit potential but also involve
increased risk. For example, the Fund may purchase a given foreign currency
through a Forward Contract if, in the judgment of the Adviser, the value of
such currency is expected to rise relative to the U.S. dollar. Conversely, the
Fund may sell the currency through a Forward Contract if the Adviser believes
that its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency exchange
rates occurs, which will increase its gross income. Where exchange rates do
not move in the direction or to the extent anticipated, however, the Fund may
sustain losses which will reduce its gross income. Such transactions,
therefore, could be considered speculative and could involve significant risk
of loss.
The Fund has established procedures 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 liquid assets which will be marked to
market on a daily basis, in an amount equal to the value of its commitments
under Forward Contracts. While these Contracts are not presently regulated by
the CFTC, the CFTC may in the future assert authority to regulate Forward
Contracts. In such event, the Fund's ability to utilize Forward Contracts in
the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES
As noted in the Prospectus, the Fund may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in which Forward
Contracts will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put options on the foreign
currency. If the value of the currency does decline, the Fund will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of
such securities, the Fund may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar
value of foreign-denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the option
will most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by the
Fund will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the
writing of a foreign currency option will constitute only a partial hedge up
to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Fund also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
RISK FACTORS IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO. The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign currencies depends
on the degree to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the Fund's
portfolio. In the case of futures and options based on an index, the portfolio
will not duplicate the components of the index, and in the case of futures and
options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contract. The
use of Forward Contracts for "cross hedging" purposes may involve greater
correlation risks. As a result, the correlation probably will not be exact.
Consequently, the Fund bears the risk that the price of the portfolio
securities being hedged will not move in the same amount or direction as the
underlying index or obligation.
For example, if the Fund purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, the Fund may enter into transactions in Forward Contracts or options
on foreign currencies in order to hedge against exposure arising from the
currencies underlying such forwards. In such instances, the Fund will be
subject to the additional risk of imperfect correlation between changes in the
value of the currencies underlying such forwards or options and changes in the
value of the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group,
may present greater risk than options or futures based on a broad market
index. This is due to the fact that a narrower index is more susceptible to
rapid and extreme fluctuations as a result of changes in the value of a small
number of securities. Nevertheless, where the Fund enters into transactions in
options or futures on narrow-based indices for hedging purposes, movements in
the value of the index should, if the hedge is successful, correlate closely
with the portion of the Fund's portfolio or the intended acquisitions being
hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between
movements in the futures or option price and the price of the underlying index
or obligation. The anticipated spread between the prices may be distorted due
to the differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of
speculators in the options, futures and forward markets. In this regard,
trading by speculators in options, futures and Forward Contracts has in the
past occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indices,
options on currencies and Options on Futures Contracts, the Fund is subject to
the risk of market movements between the time that the option is exercised and
the time of performance thereunder. This could increase the extent of any loss
suffered by the Fund in connection with such transactions.
In writing a covered call option on a security, index or Futures Contract, the
Fund also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying index or instrument. For example, where the Fund covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Fund may not be
fully covered. As a result, the Fund could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indices or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of the Fund's portfolio. When the Fund writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option,
in the case of a call, or fall below the exercise price, in the case of a put,
the option will not be exercised and the Fund will retain the amount of the
premium, less related transaction costs, which will constitute a partial hedge
against any decline that may have occurred in the Fund's portfolio holdings or
any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of
the holder to warrant exercise of the option, however, and the option is
exercised, the Fund will incur a loss which may only be partially offset by
the amount of the premium it received. Moreover, by writing an option, the
Fund may be required to forego the benefits which might otherwise have been
obtained from an increase in the value of portfolio securities or other assets
or a decline in the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the
hedging transactions.
It should also be noted that the Fund may enter into transactions into options
(except for options on foreign currencies), Futures Contracts, Options on
Futures Contracts and Forward Contracts not only for hedging purposes, but
also for non-hedging purposes intended to increase portfolio returns. Non-
hedging transactions in such investments involve greater risks and may result
in losses which may not be offset by increases in the value of portfolio
securities or declines in the cost of securities to be acquired. The Fund will
only write covered options, such that liquid assets will be segregated at all
times, unless the option is covered in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, the method of covering an
option employed by the Fund may not fully protect it against risk of loss and,
in any event, the Fund could suffer losses on the option position which might
not be offset by corresponding portfolio gains.
The Fund also may enter into transactions in Futures Contracts, Options on
Futures Contracts, Options on Foreign Currency, and Forward Contracts for
other than hedging purposes, which could expose the Fund to significant risk
of loss if foreign currency exchange rates, market prices or interest rates do
not move in the direction or to the extent anticipated. In this regard, the
foreign currency may be extremely volatile from time to time, as discussed in
the Prospectus and in this SAI, and the use of such transactions for non-
hedging purposes could therefore involve significant risk of loss.
With respect to the writing of straddles on securities, the Fund incurs the
risk that the price of the underlying security will not remain stable, that
one of the options written will be exercised and that the resulting loss will
not be offset by the amount of the premiums received. Such transactions,
therefore, create an opportunity for increased return by providing the Fund
with two simultaneous premiums on the same security, but involve additional
risk, since the Fund may have an option exercised against it regardless of
whether the price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While the Fund will enter into options or futures positions only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close out a position
held by the Fund, and the Fund could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Fund
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it
is disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Fund's ability
effectively to hedge its portfolio, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon
may be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
Contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities or other assets held by the Fund or decreases in the prices of
securities or other assets the Fund intends to acquire. Where the Fund enters
into such transactions for other than hedging purposes, the margin
requirements associated with such transactions could expose the Fund to
greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular
futures or option contract. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the
portfolio of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to
liquidate the underlying Futures Contract, subject to the risks of the
availability of a liquid offset market described herein. The writer of an
Option on a Futures Contract is subject to the risks of commodity futures
trading, including the requirement of initial and variation margin payments,
as well as the additional risk that movements in the price of the option may
not correlate with movements in the price of the underlying security, index,
currency or Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on
the value of positions held by the Fund. Further, the value of such positions
could be adversely affected by a number of other complex political and
economic factors applicable to the countries issuing the underlying
currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available
information on which trading systems will be based may not be as complete as
the comparable data on which the Fund makes investment and trading decisions
in connection with other transactions. Moreover, because the foreign currency
market is a global, 24-hour market, events could occur in that market which
will not be reflected in the forward, futures or options markets until the
following day, thereby making it more difficult for the Fund to respond to
such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the
underlying currency, which in turn requires traders to accept or make delivery
of such currencies in conformity with any U.S. or foreign restrictions and
regulations regarding the maintenance of foreign banking relationships, fees,
taxes or other charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of
time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of Forward Contracts could lose
amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund.
Where no such counterparty is available, it will not be possible to enter into
a desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and the Fund could be required to
retain options purchased or written, or Forward Contracts entered into, until
exercise, expiration or maturity. This in turn could limit the Fund's ability
to profit from open positions or to reduce losses experienced, and could
result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. The
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the
same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures. As a result,
many of the risks of over-the-counter trading may be present in connection
with such transactions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (the "OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting the Fund to liquidate open positions at a profit prior
to exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or prohibitions
on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes
of the Commodity Exchange Act, regulations of the CFTC require that the Fund
enter into transactions in Futures Contracts and Options on Futures Contracts
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.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following
procedure. Except as provided below, the Fund intends to write over-the-
counter options only with primary U.S. Government securities dealers
recognized as such by the Federal Reserve Bank of New York. Also, the
contracts the Fund has in place with such primary dealers provide that the
Fund has the absolute right to repurchase an option it writes at any time at a
price which represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event will exceed a
price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
generally is based on a multiple of the premium received by the Fund for
writing the option, plus the amount, if any of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
the-money. The Fund will treat all or a portion of the formula as illiquid for
purposes of the SEC illiquidity ceiling test imposed by the SEC staff. The
Fund may also write over-the-counter options with non-primary dealers,
including foreign dealers (where applicable), and will treat the assets used
to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (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 deterioriates. Recent issuers
of indexed securities have included banks, corporations, and certain U.S.
government agencies.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed
without the approval of the holders of a majority of the Fund's shares (which,
as used in this SAI, means the lesser of (i) more than 50% of the outstanding
shares of the Trust or a series or class, as applicable, or (ii) 67% or more
of the outstanding shares of the Trust or a series or class, as applicable,
present at a meeting if holders of more than 50% of the outstanding shares of
the Trust or a series or class, as applicable, are represented in person or by
proxy). Except for Investment Restriction (1), and the Fund's nonfundamental
policy with respect to illiquid securities, these investment restrictions and
policies are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its total assets,
and then only as a temporary measure for extraordinary or emergency
purposes, or pledge, mortgage or hypothecate an amount of its assets (taken
at market value) in excess of 15% of its total assets, in each case taken at
the lower of cost or market value. For the purpose of this restriction,
collateral arrangements with respect to options, Futures Contracts, Options
on Futures Contracts, Forward Contracts and options on foreign currencies,
and payments of initial and variation margin in connection therewith, are
not considered a pledge of assets.
(2) Underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security.
(3) Concentrate its investments in any particular industry, but if it is
deemed appropriate for the attainment of its investment objective, the Fund
may invest up to 25% of its assets (taken at market value at the time of
each investment) in securities of issuers in any one industry.
(4) Purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment
trusts, which deal in real estate or interests therein and securities
secured by real estate), or mineral leases, commodities or commodity
contracts (except contracts for the future or forward delivery of securities
or foreign currencies and related options, and except Futures Contracts and
Options on Futures Contracts) in the ordinary course of its business. The
Fund reserves the freedom of action to hold and to sell real estate or
mineral leases, commodities or commodity contracts acquired as a result of
the ownership of securities.
(5) Make loans to other persons except by the purchase of obligations in
which the Fund is authorized to invest and by entering into repurchase
agreements; provided that the Fund may lend its portfolio securities
representing not in excess of 30% of its total assets (taken at market
value). Not more than 10% of the Fund's total assets (taken at market value)
may be invested in repurchase agreements maturing in more than seven days.
The Fund may purchase all or a portion of an issue of debt securities
distributed privately to financial institutions. For these purposes the
purchase of short-term commercial paper or a portion or all of an issue of
debt securities which are part of an issue to the public shall not be
considered the making of a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market
value) to be invested in the securities of such issuer, other than U.S.
Government securities.
(7) Purchase voting securities of any issuer if such purchase, at the
time thereof, would cause more than 10% of the outstanding voting securities
of such issuer to be held by the Fund; or purchase securities of any issuer
if such purchase at the time thereof would cause more than 10% of any class
of securities of such issuer to be held by the Fund. For this purpose all
indebtedness of an issuer shall bedeemed a single class and all preferred
stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by the Fund
one or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or
both, all taken at market value.
(10) Purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of securities and the Fund may make
margin deposits in connection with options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign currencies.
(11) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a equivalent in
kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon equivalent conditions.
(12) Purchase securities issued by any other registered investment company
or investment trust except by purchase in the open market where no
commission or profit to a sponsor or dealer results from such purchase other
than the customary broker's commission, or except when such purchase, though
not made in the open market, is part of a plan of merger or consolidation;
provided, however, that the Fund will not purchase such securities if such
purchase at the time thereof would cause more than 10% of its total assets
(taken at market value) to be invested in the securities of such issuers;
and, provided further, that the Fund will not purchase securities issued by
an open-end investment company.
(13) Write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the Fund from writing,
purchasing and selling puts, calls or combinations thereof with respect to
securities, indexes of securities or foreign currencies, and with respect to
Futures Contracts.
(14) Issue any senior security (as that term is defined in the 1940 Act),
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder. For the purposes of this restriction,
collateral arrangements with respect to options, Futures Contracts and
Options on Futures Contracts and collateral arrangements with respect to
initial and variation margins are not deemed to be the issuance of a senior
security.
As a non-fundamental policy, the Fund will not (i) knowingly invest in
securities which are subject to legal or contractual restrictions on resale
(other than repurchase agreements), unless the Board of Trustees has
determined that such securities are liquid based upon trading markets for the
specific security, if, as a result thereof, more than 15% of the Fund's net
assets (taken at market value) would be so invested and (ii) invest 25% or
more of the market value of its total assets in securities of issuers in any
one industry.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in companies which,
including their respective predecessors, have a record of less than three
years" continuous operation.
In order to comply with certain state statutes, the Fund will not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio securities
if the percentage of securities so pledged, mortgaged or hypothecated would
exceed 33 1/3%. The Fund also may not invest more than 5% of the value of the
Fund's net assets, valued at the lower of cost or market, in warrants.
Included within such amount, but not to exceed 2% of the value of the Fund's
net assets, may be warrants which are not listed on the New York or American
Stock Exchange. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
These operating policies are not fundamental and may be changed without
shareholder approval.
4. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Fund. The Adviser is responsible for the investment management of the
Fund's assets and the officers of the Trust are responsible for its
operations. The Trustees and officers of the Trust are listed below, together
with their principal occupations during the past five years. (Their titles may
have varied during that period.)
TRUSTEES
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
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 N.T. Butterfield & Son Ltd., (prior to November
1997) Chairman
Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 7/9/27)
Benchmark Advisers, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (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 manufacturer), Director
Address: 36080 Shaker Blvd., Hunting Valley, Ohio
OFFICERS
LESLIE J. NANBERG,* Vice President (born 11/4/45)
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act") of the Adviser, whose address is 500 Boylston
Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
Massachusetts Financial Services Company ("MFS") or with certain other funds
of which MFS or a subsidiary is the investment adviser or distributor. Messrs.
Shames and Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar positions with certain other MFS affiliates. Mr. Bailey is a Director
of Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"),
the corporate parent of MFS.
The Fund pays compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket
expenses. The Trust has adopted a retirement plan for non-interested Trustees
and Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 75
and if the Trustee has completed at least five years of service, he would be
entitled to annual payments during his lifetime of up to 50% of such Trustee's
average annual compensation (based on the three years prior to his retirement)
depending on his length of service. A Trustee may also retire prior to age 75
and receive reduced payments if he has completed at least five years of
service. Under the plan, a Trustee (or his beneficiaries) will also receive
benefits for a period of time in the event the Trustee is disabled or dies.
These benefits will also be based on the Trustee's average annual compensation
and length of service. There is no retirement plan provided by the Trust for
Messrs. Scott and Shames. The Fund will accrue its allocable share of
compensation expenses each year to cover current years service and amortize
past service cost.
Set forth in below is certain information concerning the cash compensation
paid to the Trustees and benefits accrued, and estimated benefits payable
under the retirement plan.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ..... $3,725 $1,005 10 $242,022
Marshall N. Cohan ..... 4,175 2,050 14 148,067
Dr. Lawrence Cohn . 3,500 730 18 123,917
Sir David Gibbons . 3,724 1,642 13 129,842
Abby M. O'Neill ....... 3,725 837 10 129,842
Walter E. Robb, III . 4,175 2,050 15 148,067
Arnold D. Scott ....... --0-- --0-- N/A --0--
Jeffrey L. Shames . --0-- --0-- N/A --0--
J. Dale Sherratt ...... 5,300 820 184,067
Ward Smith ............ 5,300 1,025 184,067
</TABLE>
(1) For fiscal year ended November 30, 1997.
(2) Based on normal retirement age of 75. See the table below for the
estimated annual benefits payable upon retirement by the Fund to a Trustee
based on his or her estimated credited years of service.
(3) Information provided is for calendar year 1997. All Trustees receiving
compensation served as Trustees of 42 funds within the MFS fund complex
(having aggregate net assets at December 31, 1997, of approximately $18.9
billion) except Mr. Bailey, who served as Trustee of 69 funds within the
MFS fund complex (having aggregate net assets at December 31, 1997, of
approximately $48 billion).
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY
FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$3,150 $473 $ 788 $1,103 $1,575
3,686 553 922 1,290 1,843
4,222 633 1,056 1,478 2,111
4,758 714 1,190 1,665 2,379
5,294 794 1,324 1,853 2,647
5,830 875 1,458 2,041 2,915
</TABLE>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of February 28, 1998, the Trustees and officers, as a group, owned less
than 1% of the outstanding shares of the Fund.
As of February 28, 1997, MFS Defined Contribution Plan, c/o Mark Leary,
Massachusetts Financial Services, 500 Bolyston Street, Boston, MA 02116-3740,
was the record owner of approximately 98.57% of the outstanding Class I shares
of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust, unless, as to liabilities to the Trust or its shareholders, it is
finally adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices, or
with respect to any matter, unless it is adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best
interest of the Trust. In the case of settlement, such indemnification will
not be provided unless it has been determined pursuant to the Declaration of
Trust, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management
dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial
Services Holdings, Inc. which in turn is an indirect wholly owned subsidiary
of Sun Life Assurance Company of Canada.
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement with the Fund dated as of September 1, 1993 (the "Advisory
Agreement"). 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 the sum of 0.75% of the first
$1 billion of the Fund's average daily net assets and effective July 1, 1997,
0.65% per annum with respect to any Fund assets in excess of $1 billion. This
fee reduction may be revised or rescinded by the Adviser with the consent of
the Fund's Board of Trustees without notice to shareholders.
For the Fund's fiscal year ended November 30, 1997, MFS received $4,624,555
under its investment advisory agreement with the Fund. For the Fund's fiscal
year ended November 30, 1996, MFS received in aggregate $4,084,641 under its
investment advisory agreement with the Fund. For the Fund's fiscal year ended
November 30, 1995, MFS received $3,363,454 under its investment advisory
agreement with the Fund. For the Fund's fiscal year ended November 30, 1994,
MFS received $3,217,779 under its investment advisory agreement with the Fund.
The Fund pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Fund (other than those assumed by the Adviser or MFD)
including: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar
or dividend disbursing agent of the Fund; expenses of repurchasing and
redeeming shares and servicing shareholder accounts; expenses of preparing,
printing and mailing share certificates, periodic reports, notices and proxy
statements to shareholders and to governmental officers and commissions;
brokerage and other expenses connected with the execution, recording and
settlement of portfolio security transactions; insurance premiums; fees and
expenses of State Street Bank and Trust Company, the Fund's Custodian, for all
services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of shares of the Fund; and expenses of shareholder meetings. Expenses
relating to the issuance, registration and qualification of shares of the Fund
and the preparation, printing and mailing of prospectuses are borne by the
Fund except that the Fund's Distribution Agreement with MFD requires MFD to
pay for prospectuses that are to be used for sales purposes. Expenses of the
Trust which are not attributable to a specific series are allocated among the
series in a manner believed by management of the trust to be fair and
equitable. For a list of the Fund's expenses, including the compensation paid
to the Trustees who are not officers of MFS, during the fiscal year ended
November 30, 1997, see "Financial Statements -- Statement of Operations" in
the Annual Report to Shareholders. Payment by the Fund of brokerage
commissions for brokerage and research services of value to the Adviser in
serving its clients is discussed under the caption "Portfolio Transactions and
Brokerage Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its
portfolio transactions and, in general, administering its affairs.
The Advisory Agreement with the Fund will remain in effect until August 1,
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 Restrictions") and,
in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Fund's shares (as defined in
"Investment Restrictions") or by either party on not more than 60 days" nor
less than 30 days' written notice. The Advisory Agreement provides that if MFS
ceases to serve as the Adviser to the Fund, the Fund will change its name so
as to delete the term "MFS" and that MFS may render services to others and may
permit other fund clients to use the term "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution and management
of the Fund, except for willful misfeasance, bad faith or gross negligence in
the performance of its or their duties or by reason of reckless disregard of
its or their obligations and duties under the Advisory Agreement.
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. For the period from March 1,
1997 through November 30, 1997, MFS received fees under the Administrative
Services Agreement of $70,970.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily
net asset value and public offering price of each class of shares of the Fund.
The Custodian does not determine the investment policies of the Fund or decide
which securities the Fund will buy or sell. The Fund may, however, invest in
securities of the Custodian and may deal with the Custodian as principal in
securities transactions. The Custodian also serves as the dividend and
distribution disbursing agent of the Fund.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Trust, dated as of September
10, 1986 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the
Fund. For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of 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 for the Fund, has
contracted with the Shareholder Servicing Agent to administer and 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 January 1, 1995 (the "Distribution Agreement"). Prior to
January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or
periods prior to January 1, 1995, such reference shall be deemed to include
FSI, as the predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of the Class A shares of the Fund is their
net asset value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class A
share of the Fund is calculated by dividing the net asset value of a Class A
share by the difference (expressed as a decimal) between 100% and the sales
charge percentage of offering price applicable to the purchase (see
"Purchases" in the Prospectus). The sales charge scale set forth in the
Prospectus applies to purchases of Class A shares of the Fund alone or in
combination with shares of all classes of certain other funds in the MFS
Family of Funds (the "MFS Funds") and other funds (as noted under Right of
Accumulation) by any person, including members of a family unit (e.g.,
husband, wife and minor children) and bona fide trustees, and also applies to
purchases made under the Right of Accumulation or a Letter of Intent (see
"Investment and Withdrawal Programs" in this SAI). A group might qualify to
obtain quantity sales charge discounts (see "Investment and Withdrawal
Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because
the sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The commission
paid to the underwriter is the difference between the total amount invested
and the sum of (a) the net proceeds to the Fund and (b) the dealer commission.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the underwriter may vary and the total sales charge may
be more or less than the sales charge calculated using the sales charge
expressed as a percentage of the offering price or as a percentage of the net
amount invested as listed in the Prospectus. In the case of the maximum sales
charge the dealer retains 5% and MFD retains approximately 3/4 of 1% of the
public offering price. In addition, MFD pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described
in the Prospectus.
During the fiscal year ended November 30, 1997, MFD received sales charges of
$28,056 and dealers received sales charges of $197,707 (as their concession on
gross sales charges of $225,763) for selling Class A shares of the Fund; the
Fund received $11,920,433 representing the aggregate net asset value of such
shares.
During the fiscal year ended November 30, 1996, MFD received sales charges of
$23,975 and dealers received sales charges of $171,664 (as their concession on
gross sales charges of $195,639) for selling Class A shares of the Fund; the
Fund received $10,014,085 representing the aggregate net asset value of such
shares.
During the fiscal year ended November 30, 1995, MFD received sales charges of
$9,592 and dealers received sales charges of $80,955 (as their concession on
gross sales charges of $90,547) for selling Class A shares of the Fund; the
Fund received $5,428,186 representing the aggregate net asset value of such
shares.
During the fiscal years ended November 30, 1997, 1996 and 1995 and the
Contingent Deferred Sales Charges ("CDSC") imposed on redemption of Class A
shares were $775, $11,233 and $1,900, respectively.
CLASS B SHARES AND CLASS I SHARES: MFD acts as agent in selling Class B shares
and Class I shares of the Fund. The public offering price of Class B shares
and Class I shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus and the Prospectus Supplement to which Class I
shares are offered).
During the fiscal years ended November 30, 1997, 1996 and 1995, the CDSC
imposed on redemption of Class B shares was $264,561, $344,491 and $472,200,
respectively.
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers
loans from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers
for the purchase of Funds shares.
The Distribution Agreement will remain in effect until August 1, 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 Trust's shares (as defined in "Investment Restrictions") and in either
case, by a majority of the Trustees who are not parties to such Distribution
Agreement or interested persons of any such party. The Distribution Agreement
terminates automatically if it is assigned and may be terminated without
penalty by either party on not more than 60 days' nor less than 30 days'
notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser
or any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting broker-
dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the
value and quality of their brokerage services, and the level of their
brokerage commissions. In the case of securities, such as government
securities, which are principally traded in the over-the-counter market (where
no stated commissions are paid but the prices include a dealer's markup or
markdown), the Adviser normally seeks to deal directly with the primary market
makers, unless in its opinion, better prices are available elsewhere. In the
case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. Securities
firms or futures commission merchants may receive brokerage commissions on
transactions involving options, Futures Contracts and Options on Futures
Contracts and the purchase and sale of underlying securities upon exercise of
options. The brokerage commissions associated with buying and selling options
may be proportionately higher than those associated with general securities
transactions. From time to time, soliciting dealer fees are available to the
Adviser on the tender of the Fund's portfolio securities in so-called tender
or exchange offers. Such soliciting dealer fees are in effect recaptured for
the Fund by the Adviser. At present no other recapture arrangements are in
effect.
Under the Advisery Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Adviser may cause the Fund to pay a
broker-dealer, which provides brokerage and research services to the Adviser,
an amount of commission for effecting a securities transaction for the Fund in
excess of the amount other broker-dealers would have charged for the
transaction if the Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and
research services provided by the executing broker-dealer viewed in terms of
either a particular transaction or the Adviser's overall responsibilities to
the Fund or to its other clients. Not all of such services are useful or of
value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts; and effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to
the availability of purchasers or sellers of securities and services in
effecting securities transactions and performing functions incidental thereto
such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold from time to time through such broker-dealer, on behalf of
the Fund. The Trust's Trustees (together with the Trustees of the other MFS
Funds) have directed the Adviser to allocate a total of $54,160 of commission
business from the MFS Funds to the Pershing Division of Donaldson Lufkin &
Jenrette as consideration for the annual renewal of certain publications
provided by Lipper Analytical Securities Corporation (which provides
information useful to the Trustees in reviewing the relationship between the
Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality
of Research provided by brokers. Results of this effort are sometimes used by
the Adviser as a consideration in the selection of brokers to execute
portfolio transactions. However, the Adviser is unable to quantify the amount
of commissions which will be paid as a result of such Research because a
substantial number of transactions will be effected through brokers which
provide Research but which were selected principally because of their
execution capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To
the extent the Fund's portfolio transactions are used to obtain such services,
the brokerage commissions paid by the Fund will exceed those that might
otherwise be paid, by an amount which cannot be presently determined. Such
services would be useful and of value to the Adviser in serving both the Fund
and other clients and, conversely, such services obtained by the placement of
brokerage business of other clients would be useful to the Adviser in carrying
out its obligations to the Fund. While such services are not expected to
reduce the expenses of the Adviser, the Adviser would, through use of the
services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff.
For the Fund's fiscal year ended November 30, 1997, the Fund paid total
brokerage commissions of $2,115,097 on total transactions (other than U.S.
Government Securities, purchased options transactions and short-term
obligations) of $1,457,214,683.
For the Fund's fiscal year ended November 30, 1996, the Fund paid total
brokerage commissions of $1,563,524 on total transactions (other than U.S.
Government Securities, purchased options transactions and short-term
obligations) of $923,701,659.
For the Fund's fiscal year ended November 30, 1995, the Fund paid total
brokerage commissions of $1,397,403 on total transactions (other than U.S.
Government securities, purchased options transactions and short-term
obligations) of $827,963,598.
During the fiscal year ended November 30, 1997, the Fund acquired and owned
securities issued by Merrill Lynch & Co., Inc. and Morgan Stanley, Dean
Witter, Discover & Co. in the amounts of $3,965,594 and $2,368,025,
respectively, as of November 30, 1997.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser or MFS or any subsidiary of MFS. Investment decisions for the Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by the Adviser to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Fund is concerned. In other cases, however, it is
believed that the Fund's ability to participate in volume transactions will
produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or
withdraw from it with a minimum of paper work. These are described below and,
in certain cases, in the Prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $50,000 or more of Class A shares of the Fund
alone or in combination with any class of shares of other MFS Funds or MFS
Fixed Fund within a 13-month period (or 36-month period in the case of
purchases of $1 million or more), the shareholder may obtain Class A shares of
the Fund at the same reduced sales charge as though the total quantity were
invested in one lump sum by completing the Letter of Intent section of the
Account Application or filing a separate Letter of Intent application
(available from the Shareholder Servicing Agent) within 90 days of the
commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the
Letter of Intent application. The shareholder or his dealer must inform MFD
that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1
million or more) plus the value of shares credited toward completion of the
Letter of Intent do not total the sum specified, he will pay the increased
amount of the sales charge as described below. Instructions for issuance of
shares in the name of a person other than the person signing the Letter of
Intent application must be accompanied by a written statement from the dealer
stating that the shares were paid for by the person signing such Letter.
Neither income dividends nor capital gain distributions taken in additional
shares will apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the
Fund pursuant to the Distribution Investment Program will also not apply
toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder
or to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable) the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released
by the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in
the premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of Class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed
Fund reaches a discount level (see "Purchases" in the Prospectus for the sales
charges on quantity purchases). For example, if a shareholder owns shares with
a current offering price value of $75,000 and purchases an additional $25,000
of Class A shares of the Fund, the sales charge for the $25,000 purchase would
be at the rate of 4% (the rate applicable to single transactions of $100,000).
A shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
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 the other MFS Funds, if
shares of the fund are available for sale. Such investments will be subject to
additional purchase minimums. Distributions will be invested at net asset
value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date
for the distribution. A shareholder considering the Distribution Investment
Program should obtain and read the prospectus of the other fund and consider
the differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan ("SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B shares made in any year
pursuant to a SWP generally are limited to 10% of the value of the account at
the time of the establishment of the SWP. SWP payments are drawn from the
proceeds of share redemptions (which would be a return of principal and, if
reflecting a gain, would be taxable). Redemptions of Class B shares will be
made in the following order: (i) any "Free Amount"; (ii) to the extent
necessary, any "Reinvested Shares"; and (iii) to the extent necessary, "Direct
Purchase" subject to the lowest CDSC (as such terms are defined in "Contingent
Deferred Sales Charge" in the Prospectus). The CDSC will be waived in the case
of redemptions of Class B shares pursuant to a SWP but will not be waived in
the case of SWP redemptions of Class A shares which are subject to a CDSC. To
the extent that redemptions for such periodic withdrawals exceed dividend
income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account. All
dividend and capital gain distributions for an account with a SWP will be
received in full and fractional shares of the Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of the Fund, change the payee
or change the amount of each payment. The Shareholder Servicing Agent may
charge the account for services rendered and expenses incurred beyond those
normally assumed by the Fund with respect to the liquidation of shares. No
charge is currently assessed against the account, but one could be instituted
by the Shareholder Servicing Agent on 60 days' notice in writing to the
shareholder in the event that the Fund ceases to assume the cost of these
services. The Fund may terminate any SWP for an account if the value of the
account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP ) or an exchange of shares of the Fund for shares of another
MFS Fund. Any SWP may be terminated at any time by either the shareholder or
the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be
made at any time either by mailing a check payable to the Fund directly to the
Shareholder Servicing Agent. The shareholder's account number and the name of
his investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the
investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose
other than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or broker-
dealer, clients of an investment adviser or other similar groups; and (4)
agrees to provide certification of membership of those members investing money
in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares
of the other MFS Funds (if available for sale) under the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchange of funds
from the shareholder's account in an MFS Fund for investment in the same class
of shares of other MFS Funds selected by the shareholder. Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to six
different funds effective on the seventh day of each month or of every third
month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Transfers will continue to be made from
a shareholder's account in any MFS Fund as long as the balance of the account
is sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to
be made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market
Fund, MFS Government Money Market Fund and Class A shares of MFS Cash Reserve
Fund will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions
in writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing signed by the
record owner(s) exactly as shares are registered; if by telephone proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request
is received by telephone or in writing before the close of business on the
last business day of the month, the Exchange Change Request will be effective
for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds,
to make exchanges of shares from one MFS Fund to another and to withdraw from
an MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except holders of shares of MFS Money Market Fund, MFS
Government Money Market Fund and holders of Class A shares of MFS Cash Reserve
Fund in the case where such shares are acquired through direct purchase or
reinvested dividends) who have redeemed their shares have a one-time right to
reinvest the redemption proceeds in the same class of shares of any of the MFS
Funds (if shares of the fund are available for sale) at net asset value
(without a sales charge) and, if applicable, with credit for any CDSC paid. In
the case of proceeds reinvested in shares of MFS Money Market Fund, MFS
Government Money Market Fund and Class A shares of MFS Cash Reserve Fund, the
shareholder has the right to exchange the acquired shares for shares of
another MFS Fund at net asset value pursuant to the exchange privilege
described below. Such a reinvestment must be made within 90 days of the
redemption and is limited to the amount of the redemption proceeds. If the
shares credited for any CDSC paid are then redeemed within six years of the
initial purchase in the case of Class B shares or 12 months of the initial
purchase in the case of certain Class A shares, a CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events,
a reinvestment within a certain period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize
currently all or a portion of any loss realized on the original redemption for
federal income tax purposes. Please see your tax adviser for further
information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account for which payment has been received by the Fund
(i.e., an established account) may be exchanged for shares of the same class
of any of the other MFS Funds (if available for sale 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 an Exchange
Request is received by the Shareholder Servicing Agent prior to the close of
regular trading on the Exchange, the exchange usually will occur on that day
if all of the requirements set forth above have been complied with at that
time. However, payment of the redemption proceeds by the Fund, and thus the
purchase of shares of the other MFS Fund, may be delayed for up to seven days
if the Fund determines that such a delay would be in the best interest of all
its shareholders. Investment dealers which have satisfied criteria established
by MFD may also communicate a shareholder's Exchange Request to the
Shareholder Servicing Agent by facsimile subject to the requirements set forth
above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for
the CDSC is carried forward to the exchanged shares. For purposes of
calculating the CDSC upon redemption of shares acquired in an exchange, the
purchase of shares acquired in one or more exchanges is deemed to have
occurred at the time of the original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy
of its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should
obtain and read the prospectus of the other MFS Fund and consider the
differences in objectives and policies before making any exchange.
Shareholders of the other MFS Funds (except shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
in the case where such shares were acquired through direct purchase and
dividends reinvested prior to June 1, 1992) have the right to exchange their
shares for shares of the Fund, subject to the conditions, if any, set forth in
their respective prospectuses. In addition, unitholders of the MFS Fixed Fund
have the right to exchange their units (except units acquired through direct
purchases) for shares of the Fund, subject to the conditions, if any, imposed
upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-
specific series of MFS Municipal Series Trust may only benefit residents of
such states. Investors should consult with their own tax advisers to be sure
this is an appropriate investment based on their residency and each state's
income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued
and is subject to certain limitations , including certain restrictions on
purchases by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund are available for purchase
by all types of tax-deferred retirement plans. MFD makes available, through
investment dealers, plans and/or custody agreements, the following:
Traditional Individual Retirement Accounts (IRAs) (for individuals who
desire to make limited contributions to a tax-deferred retirement program
and, if eligible, to receive a federal income tax deduction for amounts
contributed);
Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire
to make limited contributions to a tax-favored retirement program);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended ("the Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested
automatically. For further details with respect to any plan, including fees
charged by the trustee, custodian or MFD, tax consequences and redemption
information, see the specific documents for that plan. Plan documents other
than those provided by MFD may be used to establish any of the plans described
above. Third party administrative services, available for some corporate
plans, may limit or delay the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code,
it is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and
any state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions
from net short-term capital gains are taxable to shareholders as ordinary
income for federal income tax purposes, whether the distributions are paid in
cash or reinvested in additional shares. A portion of the Fund's ordinary
income dividends is normally eligible for the dividends received deduction for
corporations if the recipient otherwise qualifies for that deduction with
respect to its holding of the Fund's shares. Availability of the deduction for
particular corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the
excess of the 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 federal income tax purposes
without regard to the length of time the shareholders have held their 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 federal
tax status of its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as 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 18
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 followed by any purchase (including purchases by exchange or by
reinvestment) without payment of an additional sales charge of Class A shares
of the Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in 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.
The Fund's transactions in options, Futures Contracts, Forward Contracts, will
be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example,
certain positions held by the Fund on the last business day of each taxable
year will be marked to market (i.e., treated as if closed out) on 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,
Forward Contracts and Futures Contracts to the extent necessary to meet the
requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-
hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. The
Fund may elect to mark to market any investments in "passive foreign
investment companies" on the last day of each year. This election may cause
the Fund to recognize ordinary 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 amount of the Fund's
assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% (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.
8. DETERMINATION OF NET ASSET VALUE;
PERFORMANCE INFORMATION
NET ASSET VALUE The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for
the following holidays (or the days on which they are observed): New Year's
Day, 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 during each such day as of the close of regular
trading on the Exchange by deducting the amount of the liabilities
attributable to the class from the value of the assets attributable to the
class and dividing the difference by the number of shares of the class
outstanding. Forward Contracts will be valued using a pricing model taking
into consideration market data from an external pricing source. Use of the
pricing services has been approved by the Board of Trustees. All other
securities, Futures Contracts and options in the Fund's portfolio (other than
short-term obligations) for which the principal market is one or more
securities or commodities exchanges (whether domestic or foreign) will be
valued at the last reported sale price or at the settlement price prior to the
determination (or if there has been no current sale, at the closing bid price)
on the primary exchange on which such securities, Futures Contracts or options
are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available,
be valued at current bid prices, unless such securities are reported on the
Nasdaq system, in which case they are valued at the last sale price or, if no
sales occurred during the day, at the last quoted bid price. Debt securities
(other than short-term obligations but including listed issues) in the Fund's
portfolio are valued on the basis of valuations furnished by a pricing service
which utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as institutional-
sized trading in similar groups of securities, yields, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data, without
exclusive reliance upon quoted prices or exchange or over-the-counter prices,
since such valuations are believed to reflect more accurately the fair value of
such securities. Short- term obligations, if any, in the Fund's portfolio are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees. Short-term securities with a remaining maturity in excess of
60 days will be valued based upon dealer supplied valuations. Portfolio
securities and over- the-counter options and Forward Contracts, for which there
are no quotations or valuations are valued at fair value as determined in good
faith by or at the direction of the Board of Trustees. A share's net asset value
is effective for orders received by the dealer prior to its calculation and
received by MFD, in its capacity as the Fund's distributor, or its agent, the
Shareholder Servicing Agent, prior to the close of the business day.
PERFORMANCE INFORMATION
The Fund will calculate its total rate of return for each class of shares for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (made with all
distributions reinvested and reflecting the CDSC or the maximum public
offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (5% maximum for Class B shares purchased on and after
January 1, 1993, but before September 1, 1993 and 4% maximum for Class B
shares) and therefore may result in a higher rate of return, (ii) a total rate
of return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be
reduced by the sales charge applicable to Class A shares (5.75% maximum) and/
or (iii) total rates of return which represent aggregate performance over a
period or year-by-year performance and which may or may not reflect the effect
of the maximum sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered for
sale to and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which
has a later class inception date than another class of shares of the Fund is
based both on (i) the performance of the Fund's newer class from its inception
date and (ii) the performance of the Fund's oldest class from its inception
date up to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense
ratios, and therefore the performance, of the Fund's classes of shares differ.
In calculating total rate of return for a newer class of shares in accordance
with certain formulas required by the SEC, the performance will be adjusted to
take into account the fact that the newer class is subject to a different
sales charge than the oldest class (e.g., if the newer class is Class A
shares, the total rate of return quoted will reflect the deduction of the
initial sales charge applicable to Class A shares; if the newer class is Class
B shares, the total rate of return quoted will reflect the deduction of the
CDSC applicable to Class B shares). However, the performance will not be
adjusted to take into account the fact that the newer class of shares bears
different class specific expenses than the oldest 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).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS
The performance results presented in Appendix A hereto under the heading
"Performance Results" assume an initial investment of $10,000 in Class B
shares and cover the period from January 1, 1988 through December 31, 1997. It
has been assumed that dividend and capital gain distributions were reinvested
in additional shares. Any performance results or total rate of return
quotation provided by the Fund should not be considered as representative of
the performance of the Fund in the future since the net asset value of shares
of the Fund will vary based not only on the type, quality and maturities of
the securities held in the Fund's portfolio, but also on changes in the
current value of such securities and on changes in the expenses of the Fund.
These factors and possible differences in the methods used to calculate total
rates of return should be considered when comparing the total rate of return
of the Fund to total rates of return published for other investment companies
or other investment vehicles. Total rate of return reflects the performance of
both principal and income. Current net asset value and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing
in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily,
Newsweek, Financial World, Financial Planning, Investment Adviser, USA Today,
Pensions and Investments, SmartMoney, Forbes, Global Finance, Registered
Representative, Institutional Investor, the Investment Company Institute,
Johnson's Charts, Morningstar, Lipper Analytical Securities Corporation, CDA
Wiesenberger, Shearson Lehman and Saloman Bros. Indices, Ibbotson, Business
Week, Lowry Associates, Media General, Investment Company Data, The New York
Times, Your Money, Strangers Investment Adviser, Financial Planning on Wall
Street, Standard and Poor's, Individual Investor, The 100 Best Mutual Funds
You Can Buy by Gordon K. Williamson, Consumer Price Index, and Sanford C.
Bernstein & Co. Fund performance may also be compared to the performance of
other mutual funds tracked by financial or business publications or
periodicals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers;
investment philosophies, strategies, techniques and criteria used in the
selection of securities to be purchased or sold for the Fund; the Fund's
portfolio holdings; the investment research and analysis process; the
formulation and evaluation of investment recommendations; and the assessment
and evaluation of credit, interest rate, market and economic risks and similar
or related matters.
The Fund may also quote evaluations mentioned in independent radio or
television broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding
and tax-deferral.
The Fund may 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 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. ("Truth in Securities Act" or
"Full Disclosure Act")
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond
funds established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity
with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual
fund to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to
target and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-
yield municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first-closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market-
value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced
fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets
fund to offer the expertise of two sub-advisors.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard(R) Equity
Fund, the first fund to invest in companies deemed to be union-friendly
by an advisory board of senior labor officials, senior managers of
companies with significant labor contracts, academics and other national
labor leaders or experts.
9. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A and Class B shares
(the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule
12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and
each respective class of shareholders. The provisions of the Distribution Plan
are severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the
extent the Fund's fixed costs are spread over a larger net asset base. Also,
an increase in net assets may lessen the adverse 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.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL
YEAR: During the fiscal year ended November 30, 1997, the Fund paid the
following Distribution Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
Class A Shares $ 464,076 $ 72,731 $ 391,345
Class B Shares $4,309,223 $3,322,573 $ 986,650
GENERAL: The Distribution Plan 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 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 Distribution Plan entered into between the Fund or
MFD and other organizations must be approved by the Board of Trustees,
including a majority of the Distribution Plan Qualified Trustees. Agreements
under the Distribution Plan must be in writing, will be terminated
automatically if assigned, and may be terminated at any time without payment
of any penalty, by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of
the Fund's shares. The Distribution Plan may not be amended to increase
materially the amount of permitted distribution expenses without the approval
of a majority of the respective class of the Fund's shares (as defined in
"Investment Restrictions") 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.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND
LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the Fund to issue an
unlimited number of full and fractional Shares of Beneficial Interest (without
par value) of one or more separate series and to divide or combine the shares
of any series into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in that series. The Trustees
have currently authorized shares of the Fund and two other series. The
Declaration of Trust further authorizes the Trustees to classify or reclassify
any series of shares into one or more classes. Pursuant thereto, the Trustees
have authorized the issuance of two classes of shares of each of the Trust's
three series, Class A shares and Class B shares and Class I shares for the
Fund and two other series, as well as Class C shares for one of the series.
Each share of a class of the Fund represents an equal proportionate interest
in the assets of the Fund allocable to that class. Upon liquidation of the
Fund, shareholders of each class are entitled to share pro rata in the net
assets of the Fund allocable to such class available for distribution to
shareholders. The Trust reserves the right to create and issue additional
series or classes of shares, in which case the shares of each class would
participate equally in the earnings, dividends and assets allocable to that
class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees in accordance with the provisions of Section 16(c) of the 1940 Act.
No material amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the Trust's shares. Shares have no pre-
emptive or conversion rights (except as described in "Purchases - Conversion
of Class B Shares" in the Prospectus). Shares are fully paid and non-
assessable. The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders
of two-thirds of the Trust's outstanding shares voting as a single class, or
of the affected series of the Trust, as the case may be, except that if the
Trustees of the Trust recommend such merger, consolidation or sale, the
approval by vote of the holders of a majority of the Trust's or the affected
series' outstanding shares (as defined in "Investment Restrictions") will be
sufficient. The Trust or any series of the Trust may also be terminated (i)
upon liquidation and distribution of its assets, if approved by the vote of
the holders of two-thirds of its outstanding shares, or (ii) by the Trustees
by written notice to the shareholders of the Trust or the affected series. If
not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that it shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust, its shareholders, Trustees, officers,
employees and agents covering possible tort or other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for any action or failure to
act, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
11. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance with tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
The Portfolio of Investments at November 30, 1997, the Statement of Assets and
Liabilities at November 30, 1997, the Statement of Operations for the year
ended November 30, 1997, the Statement of Changes in Net Assets for the years
ended November 30, 1997 and 1996, the Notes to Financial Statements and the
Independent Auditors' Report, each of which is included in the Annual Report
to shareholders of the Fund, are incorporated by reference into this SAI and
have been so incorporated in reliance upon the report of Deloitte & Touche
LLP, independent auditors, as experts in accounting and auditing. A copy of
the Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below 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. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
PERFORMANCE RESULTS -- CLASS B SHARES
<CAPTION>
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- --------------- ------------- --------- -----
<S> <C> <C> <C> <C>
December 31, 1988............. $11,411 $ 0 $ 129 $11,540
December 31, 1989............. 14,535 0 388 14,923
December 31, 1990............. 13,896 147 589 14,632
December 31, 1991............. 16,682 1,576 788 19,046
December 31, 1992............. 17,273 2,486 843 20,602
December 31, 1993............. 16,634 3,583 1,295 21,512
December 31, 1994............. 15,669 3,375 2,272 21,316
December 31, 1995............. 18,805 7,466 3,454 29,725
December 31, 1996............. 17,056 12,668 4,808 34,532
December 31, 1997............. 17,551 17,707 7,460 42,718
</TABLE>
Explanatory Notes: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. No adjustment
has been made for income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of November 30, 1997.
AVERAGE ANNUAL TOTAL RETURNS
-------------------------------------
1 YEAR 5 YEAR 10 YEAR
Class A Shares with sales charge ....... 17.50% 15.22%(1) 16.36%(1)
Class A Shares without sales charge .... 24.67% 16.59%(1) 17.05%(1)
Class B Shares with CDSC ............... 19.80% 15.48% 16.61%
Class B Shares without CDSC ............ 23.66% 15.70% 16.61%
Class I Shares ......................... 24.09%(2) 15.78%(2) 16.65%(2)
(1) Class A share performance includes the performance of the Fund's Class B
shares for periods prior to the inception of Class A shares on September
7, 1993. Sales charges, expenses and expense ratios, and therefore
performance, for Class A and Class B shares differ. Class A share
performance has been adjusted to reflect that Class A shares generally are
subject to an initial sales charge (unless the performance quotation does
not give effect to the initial sales charge) whereas Class B shares
generally are subject to a CDSC. Class A share performance has not,
however, been adjusted to reflect differences in operating expenses (e.g.,
Rule 12b-1 fees), which generally are higher for Class B shares.
(2) Class I share performance includes the performance of the Fund's Class B
shares for the periods prior to the inception of Class I shares on January
2, 1997. Sales charges, expenses and expense ratios, and therefore
performance for Class I and B shares differ. Class I share performance has
been adjusted to reflect that Class I shares are not subject to a CDSC,
whereas Class B shares generally are subject to a CDSC. Class I share
performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class I shares.
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
LARGE CAP GROWTH
FUND
500 Boylston Street
Boston, MA 02116
[Logo]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MLC-13-4/98/.5M 03/203
<PAGE>
MFS INTERMEDIATE INCOME FUND
SUPPLEMENT TO THE APRIL 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 APRIL 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
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.......................................... 0.76%
Rule 12b-1 Fees.......................................... None
Other Expenses(1)........................................ 0.42%
----
Total Operating Expenses................................. 1.18%
- -------------------
(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."
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........................................ $12
3 years....................................... 37
5 years....................................... 65
10 years...................................... 143
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.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in
conjunction with the financial statements included in the Fund's Annual Report
to Shareholders which are incorporated by reference into the SAI in reliance
upon the report of the Fund's independent auditors, given upon their authority
as experts in accounting and auditing. The Fund's independent auditors are
Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS - CLASS I SHARES
PERIOD ENDED
NOVEMBER 30,1997*
----------------
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 8.43
Income from investment operations # -
Net investment income $ 0.61
Net realized and unrealized loss
on investments and foreign currency transactions (0.17)
Total from investment operations $ 0.44
Less distributions declared to shareholders -
From net investment income $(0.46)
------
Net asset value - end of period $ 8.41
------
Total return 5.07%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.03%+
Net investment income 6.52%+
Portfolio turnover 226%
Net assets, end of period
(000 omitted) $ 3
- --------------------------
* For the period from the inception of Class I shares, January 2, 1997
through November 30, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
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; and
(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.
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.
<PAGE>
SHARE CLASSES OFFERED BY THE FUND
Three classes of shares of the Fund currently are offered for sale, Class A
shares, Class B 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 and Class B 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 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 I shares do not convert to any
other class of shares of the Fund.
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 and Class B shares because expenses
attributable to Class A shares and Class B shares generally will be higher.
THE DATE OF THIS SUPPLEMENT IS APRIL 1, 1998
<PAGE>
MFS(R) INTERMEDIATE INCOME FUND
APRIL 1, 1998
PROSPECTUS
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
This Prospectus pertains to MFS Intermediate Income Fund (the "Fund"), a non-
diversified series of MFS Series Trust II (the "Trust"), an open-end
management investment company consisting of three series. The Fund's
investment objective is to preserve capital and provide high current income.
BECAUSE OF THE FUND'S POLICY OF INVESTING TO A SIGNIFICANT EXTENT IN FOREIGN
SECURITIES, INVESTMENTS IN THIS FUND MAY BE SUBJECT TO A GREATER DEGREE OF
RISK THAN INVESTMENTS IN OTHER INVESTMENT COMPANIES WHICH INVEST ENTIRELY IN
DOMESTIC SECURITIES (see "Investment Objective and Policies"). The minimum
initial investment generally is $1,000 per account (see "Information
Concerning Shares of the Fund -- Purchases"). The Fund's investment adviser
and distributor are Massachusetts Financial Services Company ("MFS" or the
"Adviser") and MFS Fund Distributors, Inc. ("MFD"), respectively, both of
which are located at 500 Boylston Street, Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY
FINANCIAL INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE
IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR
SHARES.
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.
This Prospectus sets forth concisely the information concerning the Trust and
Fund that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information dated April 1, 1998, as amended or
supplemented from time to time (the "SAI"), which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 44 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
Page
1. Expense Summary ..................................... 3
2. Condensed Financial Information ..................... 5
3. The Fund ............................................ 8
4. Investment Objective and Policies ................... 8
5. Certain Securities and Investment Techniques ........ 10
6. Additional Risk Factors ............................. 17
7. Management of the Fund .............................. 23
8. Information Concerning Shares of the Fund ........... 24
Purchases ........................................ 24
Exchanges ........................................ 31
Redemptions and Repurchases ...................... 33
Distribution Plan ................................ 36
Distributions .................................... 38
Tax Status ....................................... 39
Net Asset Value .................................. 40
Description of Shares, Voting Rights and
Liabilities ............................................ 40
Performance Information .......................... 41
9. Shareholder Services ................................ 42
Appendix A .......................................... A-1
Appendix B .......................................... B-1
Appendix C .......................................... C-1
Appendix D .......................................... D-1
<PAGE>
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
CLASS A CLASS B
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a percentage of
offering price) 4.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) ........ See Below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees .............................. 0.76% 0.76%
Rule 12b-1 Fees .............................. 0.00%(2) 1.00%(3)
Other Expenses(4) ............................ 0.42% 0.42%
---- ----
Total Operating Expenses ..................... 1.18% 2.18%
- ------------
(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 (a "CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Information Concerning Shares of the Fund -- Purchases" below).
(2) The Fund has adopted a distribution plan for its 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 the average daily net assets attributable to Class A
shares. Payment of the 0.10% per annum Class A distribution fee will
commence on such date as the Trustees of the Trust may determine. Payment of
the 0.25% per annum Class A service fee will commence on the date that net
assets attributable to Class A shares first equal or exceed $40 million.
(See "Information Concerning Shares of the Fund -- Distribution Plan"
below).
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to 1.00% per annum of the average daily net assets
attributable to Class B shares. Distribution expenses paid under the
Distribution Plan, together with any CDSC, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge (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."
<PAGE>
EXAMPLE OF EXPENSES
------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B
- ------ ------- ----------------
(1)
1 year ................................. $ 59 $ 62 $ 22
3 years ................................ 83 98 68
5 years ................................ 109 137 117
10 years ................................ 184 226(2) 226(2)
- -----------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund
will bear directly or indirectly. More complete descriptions of the following
Fund expenses are set forth in the following sections: (i) varying sales
charges on share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases";
(iii) management fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e.,
distribution plan) fees -- "Distribution 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.
<PAGE>
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the
Fund's independent auditors given upon their authority, as experts in
accounting and auditing. The Fund's current independent auditors are Deloitte
& Touche LLP.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995 1994 1993***
- --------------------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period .. $ 8.57 $ 8.59 $ 7.96 $ 8.94 $ 9.11
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income ................ $ 0.55 $ 0.55 $ 0.57 $ 0.59 $ 0.11
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ............... (0.18) (0.01) 0.61 (0.95) (0.17)
------ ------ ------ ------ ------
Total from investment operations ... $ 0.37 $ 0.54 $ 1.18 $(0.36) $(0.06)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income++ ......... $(0.55) $(0.56) $(0.55) $ -- $(0.09)
From net realized gain on investments
and foreign currency transactions ... -- -- -- -- (0.02)
Tax return of capital ................ -- -- -- (0.62) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ...................... $(0.55) $(0.56) $(0.55) $(0.62) $(0.11)
------ ------ ------ ------ ------
Net asset value - end of period ........ $ 8.39 $ 8.57 $ 8.59 $ 7.96 $ 8.94
------ ------ ------ ------ ------
Total return+ .......................... 4.59% 6.61% 15.40% (4.27)% (0.66)%**
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## ........................... 1.17% 1.17% 1.14% 1.18% 1.22%*
Net investment income ................ 6.63% 6.58% 6.81% 7.10% 6.43%*
PORTFOLIO TURNOVER ..................... 226% 288% 275% 211% 376%
NET ASSETS AT END OF PERIOD (000 OMITTED) $30,833 $21,291 $12,659 $3,432 $258
- ----------
* Annualized.
** Not annualized.
*** For the period from the inception of Class A shares, September 7, 1993, through November 30, 1993.
# Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
+ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
++ The Fund had distributions in excess of net investment income of $0.003 for the year ended November 30, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period . $ 8.57 $ 8.58 $ 7.96 $ 8.93 $ 8.88
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income ............... $ 0.47 $ 0.46 $ 0.48 $ 0.47 $ 0.47
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions .............. (0.18) (0.01) 0.61 (0.92) 0.26
------ ------ ------ ------ ------
Total from investment operations .. $ 0.29 $ 0.45 $ 1.09 $(0.45) $ 0.73
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income(++) ...... $(0.46) $(0.46) $(0.47) $ -- $(0.45)
From net realized gain on investments
and foreign currency transactions .. -- -- -- -- (0.16)
Tax return of capital ............... -- -- -- (0.52) (0.07)
------ ------ ------ ------ ------
Total distributions declared to
shareholders .................... $(0.46) $(0.46) $(0.47) $(0.52) $(0.68)
------ ------ ------ ------ ------
Net asset value - end of period ....... $ 8.40 $ 8.57 $ 8.58 $ 7.96 $ 8.93
------ ------ ------ ------ ------
Total return .......................... 3.57% 5.52% 14.12% (5.24)% 8.42%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses## .......................... 2.19% 2.24% 2.23% 2.22% 2.15%
Net investment income ............... 5.61% 5.47% 5.79% 5.60% 5.19%
PORTFOLIO TURNOVER .................... 226% 288% 275% 211% 376%
NET ASSETS AT END OF PERIOD (000
OMITTED) ............................. $119,436 $171,148 $232,312 $292,619 $466,955
- ----------
# Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
(++) The Fund had distributions in excess of net investment income of $0.003 for the year ended November 30, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1992 1991 1990 1989 1988***
- -------------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 9.31 $ 9.23 $ 9.50 $ 9.77 $ 9.47
------ ------ ------ ------ ------
Income from investment operations -
Net investment income ............. $ 0.62 $ 0.58 $ 0.59 $ 0.68 $ 0.35
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions ............ (0.26) 0.32 (0.02) (0.08) 0.10
------ ------ ------ ------ ------
Total from investment operations $ 0.36 $ 0.90 $ 0.57 $ 0.60 $ 0.45
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income ........ $(0.57) $(0.56) $(0.45) $(0.85) $(0.12)
From net realized gain on
investments and foreign currency
transactions ..................... (0.15) (0.14) -- (0.02) (0.03)
From paid-in capital .............. (0.07) (0.12) (0.39) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders .................. $(0.79) $(0.82) $(0.84) $(0.87) $(0.15)
------ ------ ------ ------ ------
Net asset value - end of period ..... $ 8.88 $ 9.31 $ 9.23 $ 9.50 $ 9.77
------ ------ ------ ------ ------
Total return ........................ 3.93% 10.30% 6.59% 6.60% 14.21%*
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses .......................... 2.20% 2.24% 2.33% 2.47% 2.79%*
Net investment income ............. 6.70% 6.65% 6.80% 7.13% 17.14%*
PORTFOLIO TURNOVER .................. 372% 603% 579% 433% 120%
NET ASSETS AT END OF PERIOD (000
OMITTED) ........................... $347,588 $196,753 $126,245 $75,039 $30,858
- ----------
* Annualized.
*** For the period from the commencement of the Fund's investment operations, August 1, 1988, through November 30, 1988.
</TABLE>
<PAGE>
3. 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 three series of shares, each of which represents a portfolio with
separate investment objectives and policies. Shares of the Fund are
continuously sold to the public and the Fund then uses the proceeds to buy
securities for its portfolio. Two classes of shares of the Fund currently are
offered 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 in the case of purchases of $1 million or more and
certain purchases by retirement plans) and are subject to an annual
distribution 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 and service fee up to a
maximum of 1.00% per annum. Class B shares will convert to Class A shares
approximately eight years after purchase. 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. The Adviser is responsible for the management of the Fund's assets
and the officers of the Trust are responsible for the Fund's operations. The
Adviser manages the portfolio from day to day in accordance with the Fund's
investment objective and policies. A majority of the Trustees are not
affiliated with the Adviser. The selection of investments and the way they are
managed depend on the conditions and trends in the economies of the various
countries of the world, their financial markets and the relationship of their
currencies to the U.S. dollar. The Fund also offers to buy back (redeem) its
shares from its shareholders at any time at net asset value, less any
applicable CDSC.
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund seeks to preserve capital and provide high
current income.
INVESTMENT POLICIES -- The Fund seeks to achieve its objective by investing in
securities that are issued or guaranteed as to principal and interest by the
U.S. Government, its agencies, authorities or instrumentalities ("U.S.
Government Securities") and in obligations issued or guaranteed by a foreign
government or any of its political subdivisions, authorities, agencies or
instrumentalities ("Foreign Government Securities"). Under normal market
conditions, at least 65% of the Fund's total assets will be invested in income
producing securities. The Fund's average weighted portfolio maturity, under
normal market conditions, will not be less than three years. The Fund intends
to maintain an average weighted portfolio maturity of approximately seven
years or less and will invest substantially all of its assets in securities
with remaining maturities less than or equal to 10 years. The Adviser believes
that this strategy will enable the Fund to preserve capital while seeking high
current income.
For purposes of the foregoing investment policy, securities having a certain
maturity will be deemed to include securities with an equivalent "duration" of
such securities. "Duration" is a commonly used measure of the longevity of a
debt instrument that takes into account the full stream of payments received
on a debt instrument, including both interest and principal payments, based on
their present values. A debt instrument's duration is derived by discounting
principal and interest payments to their present value using the instrument's
current yield to maturity and taking the dollar-weighted average time until
those payments will be received. Contractual rights to dispose of a security,
call options and prepayment assumptions may be considered in calculating
duration and average maturity because such rights limit the period during
which the Fund bears a market risk with respect to the security.
U.S. Government Securities generally do not involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from U.S. Government Securities are generally
lower than the yields available from other fixed income securities. Like other
interest bearing securities, however, the values of U.S. Government Securities
change as interest rates fluctuate. Shorter-term U.S. and Foreign Government
Securities generally are more stable and less susceptible to principal loss
than longer-term securities.
The Fund may invest up to 50% of its net assets in Foreign Government
Securities, including up to 20% of the Fund's net assets in securities of
government, government-related, and supranational issuers located, or
primarily conducting their business, in emerging markets (see "Investment
Techniques -- Emerging Market Securities" below). Although the percentage of
the Fund's assets invested in Foreign Government Securities will vary
depending on the relative yields of such securities, the state of the
economies of the principal countries around the world, the interest rate
climate of such countries, their financial markets and the relationship of
their currencies to the U.S. dollar, under normal conditions the Fund's
portfolio is expected to be globally invested. Up to 10% of the Fund's net
assets may be invested in non-convertible fixed-income securities rated BB or
lower by Standard & Poor's Rating Services ("S&P"), Fitch IBCA ("Fitch") or
Duffs & Phelps Credit Rating Co. ("Duff & Phelps") or Ba or lower by Moody's
Investors Services, Inc. ("Moody's") or, if unrated, determined to be of
equivalent quality by the Adviser (commonly referred to as "junk bonds"). See
"Additional Risk Factors -- Lower Rated Fixed Income Securities" below. For a
description of these and other rating categories, see Appendix C.
Investments in Foreign Government Securities and currency will be evaluated on
the basis of fundamental economic criteria (e.g., relative inflation levels
and trends, growth rate forecasts, balance of payments status and economic
policies) as well as technical and political data. In addition to the
foregoing, interest rates are evaluated on the basis of differentials or
anomalies that may exist between different countries. The Foreign Government
Securities in which the Fund intends to invest will generally consist of
obligations supported by national, state or provincial governments or similar
political subdivisions. The Fund may hold foreign currency for hedging
purposes to protect against declines in the U.S. dollar value of Foreign
Government Securities held by the Fund and against increases in the U.S.
dollar value of the Foreign Government Securities which the Fund might
purchase. The Fund may also hold foreign currency for other purposes. (See
"Additional Risk Factors -- Foreign Securities" below).
Consistent with the Fund's investment objective and policies, the Fund may
also invest in fixed income securities of corporate issuers.
Given the above average investment risk inherent in the Fund, investment in
shares of the Fund should not be considered a complete investment program and
may not be appropriate for all investors.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Consistent with the Fund's investment objective and policies, the Fund may
engage in the following securities transactions and investment techniques,
many of which are described more fully in the SAI. See "Certain Securities and
Investment Techniques" in the SAI.
U.S. GOVERNMENT SECURITIES: The U.S. Government Securities in which the Fund
intends to invest include (i) U.S. Treasury obligations, which differ only in
their interest rates, maturities and times of issuance: U.S. Treasury bills
(maturities of one year or less); U.S. Treasury notes (maturities of one to
ten years); and U.S. Treasury bonds (generally original maturities of greater
than ten years), all of which are backed by the full faith and credit of the
United States; and (ii) obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities, some of which are backed by the
full faith and credit of the U.S. Treasury, e.g., direct pass-through
certificates of the Government National Mortgage Association (the "GNMA");
some of which are supported by the right of the issuer to borrow from the U.S.
Government, e.g., obligations of Federal Home Loan Banks; and some of which
are backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association. For a description of obligations issued by
U.S. Government agencies, authorities or instrumentalities, see Appendix B to
this Prospectus.
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities.
Such loans will usually be made only to member banks of the Federal Reserve
System and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the "Exchange") and would be required to be secured continuously by
collateral in cash, U.S. Government Securities or an irrevocable letter of
credit maintained on a current basis at an amount at least equal to the market
value of the securities loaned. The Fund would continue to collect the
equivalent of the interest on the securities loaned and would also receive
either interest (through investment of cash collateral) or a fee (if the
collateral is U.S. Government Securities or a letter of credit).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures which are
intended to minimize risk.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act")
("restricted securities"), including those that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act ("Rule
144A securities"). A determination is made based upon a continuing review of
the trading markets for the specific Rule 144A security, whether such security
is liquid and thus not subject to the Fund's limitation on investing not more
than 15% of its net assets in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring the liquidity of Rule 144A securities. The Board,
however, retains oversight of the liquidity determinations, focusing on
factors, such as valuation, liquidity and availability of information.
Investing in Rule 144A securities could have the effect of decreasing the
level of liquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing Rule 144A securities held
in the Fund's portfolio. Subject to the Fund's 15% limitation on investments
in illiquid investments, the Fund may also invest in restricted securities
that may not be sold under Rule 144A, which presents certain risks. As a
result, the Fund might not be able to sell these securities when the Adviser
wishes to do so, or might have to sell them at less than fair value. In
addition, market quotations are less readily available. Therefore, the
judgment of the Adviser may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
INVESTMENTS FOR TEMPORARY DEFENSIVE PURPOSES -- During periods of unusual
market conditions when the Adviser believes that investing for temporary
defensive purposes is appropriate, or in order to meet anticipated redemption
requests, a large portion or all of the assets of the Fund may be invested in
cash or cash equivalents including, but not limited to, obligations of banks
with assets of $1 billion or more (including certificates of deposit, bankers'
acceptances and repurchase agreements), commercial paper, short-term notes,
obligations issued or guaranteed by the U.S. Government or any of its
agencies, authorities or instrumentalities and related repurchase agreements.
See Appendix D to this Prospectus for a description of certain short-term
investments.
MORTGAGE DOLLAR ROLL TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which
the Fund sells mortgage-backed securities for delivery in the future
(generally within 30 days) and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. The Fund will only enter into covered rolls. A "covered
roll" is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position which matures on or before the
forward settlement date of the dollar roll transaction.
WHEN-ISSUED SECURITIES: In order to help ensure the availability of suitable
securities for its portfolio, the Fund may purchase securities on a "when-
issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. It is expected that, under normal circumstances, the Fund
will take delivery of such securities. In general, the Fund does not pay for
the securities until received and does not start earning interest on the
obligations until the contractual settlement date. While awaiting delivery of
the obligations purchased on such bases, the Fund will segregate liquid assets
sufficient to cover its commitments.
ZERO COUPON BONDS: The Fund may invest in zero coupon bonds. Zero coupon bonds
are debt obligations which are issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds will accrue and compound over the period until maturity. Zero coupon
bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such investments may experience greater volatility
in market value due to changes in interest rates than debt obligations which
make regular payments of interest. The Fund will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
The Fund may invest in Collateralized Mortgage Obligations ("CMOs"), which are
debt obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by certificates issued by the
GNMA, the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation but also may be collateralized by whole loans or private
mortgage pass-through securities (such as collateral collectively hereinafter
referred to as "Mortgage Assets"). The Fund may also invest a portion of its
assets in multiclass pass-through securities which are interests in a trust
composed of Mortgage Assets. The Mortgage Assets must be issued or guaranteed
by the U.S. Government, its agencies, authorities or instrumentalities.
Payments of principal of and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. In
a CMO, a series of bonds or certificates is usually issued in multiple classes
with different maturities. Each class of CMOs, often referred to as a
"tranche", is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of
all or part of the premium if any has been paid. Interest is paid or accrues
on all classes of CMOs on a monthly, quarterly or semiannual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways. In a common
structure, payments of principal, including any principal prepayments, on
Mortgage Assets are applied to the classes of the series of a CMO in the order
of their respective stated maturities or final distribution dates, so that no
payment of principal will be made on any class of CMOs until all other classes
having an earlier stated maturity or final distribution date have been paid in
full. Certain CMOs may be stripped (securities which provide only the
principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" in the SAI for a discussion of the risks of
investing in these stripped securities and of investing in classes consisting
primarily of interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or
final distribution date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final distribution date, but
may be retired earlier. PAC Bonds generally require payments of a specified
amount of principal on each payment date. PAC Bonds are always parallel pay
CMOs with the required principal payment on such securities having the highest
priority after interest has been paid to all classes.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed-income securities whose values at maturity (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 the instrument.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS"), which are derivative
multiclass mortgage securities usually structured with two classes that
receive different proportions of interest and principal distributions from an
underlying pool of mortgage assets. For a further description of SMBS and the
risks related to transactions therein, see the SAI.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser to have an emerging market economy, taking
into account a number of factors, including whether the country has a low-to
middle-income economy according to the International Bank for Reconstruction
and Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets.
The Adviser determines whether an issuer's principal activities are located in
an emerging market country by considering such factors as its country of
organization, the principal trading market for its securities and the source
of its revenues and location of its assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country. See "Additional Risk Factors -- Emerging Market Securities".
BRADY BONDS: The Fund may invest in Brady bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, 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
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the Brady bonds.
Brady bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payaments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady bonds and the history of defaults of countries issuing Brady bonds with
respect to commercial bank loans by public and private entities, investments
in Brady bonds should be viewed as speculative.
SWAPS AND RELATED TRANSACTIONS -- As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party
of cash payments based upon different interest rate indexes, currencies, and
other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Fund might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
notional principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the
extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from
the counterparty selling such interest rate cap. The sale of an interest rate
floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements 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 for further discussion on, and the risks
involved, in, these activities.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS: The Fund may enter
into transactions in options, futures and forward contracts on a variety of
instruments and indices, in order to protect against declines in the value of
portfolio securities or increases in the cost of securities or other assets to
be acquired and, subject to applicable law, to increase the Fund's gross
income. The types of instruments to be purchased and sold by the Fund, the
nature of the transactions which may be entered into and the risks associated
therewith are described in the SAI, which should be read in conjunction with
the following section.
OPTIONS
OPTIONS ON SECURITIES
- -- The Fund may write (sell) covered call and put options and purchase call
and put options on securities. The Fund will write options on securities for
the purpose of increasing its return on such securities and/or to protect the
value of its portfolio. In particular, where the Fund writes an option which
expires unexercised or is closed out by the Fund at a profit, it will retain
the premium paid for the option which will increase its gross income and will
offset in part the reduced value of the portfolio security underlying the
option, or the increased cost of portfolio securities to be acquired. However,
the writing of options constitute only a partial hedge, up to the amount of
the premium, less any transaction costs. In contrast, however, if the price of
the underlying security moves adversely to the Fund's position, the option may
be exercised and the Fund will be required to purchase or sell the underlying
security at a disadvantageous price, which may only be partially offset by the
amount of the premium. The Fund may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has
written call options.
The Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the
prices of securities that the Fund wants to purchase at a later date. In the
event that the expected market fluctuations occur, the Fund may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the options purchased. The premium paid for a put or call option plus
any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise or liquidation of the option, and, unless the price of the
underlying security changes sufficiently, the option may expire without value
to the Fund.
In certain instances, the Fund may enter into options on Treasury securities
which may be referred to as "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option.
The Fund may also enter into options on the yield "spread", or yield
differential between two securities, a transaction referred to as a "yield
curve" option, for hedging or non-hedging purposes. In contrast to other types
of options, a yield curve option is based on the difference between the yields
of designated securities rather than the actual prices of the individual
securities. Yield curve options written by the Fund will be covered but could
involve additional risks.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- The Fund may enter into interest rate and foreign
currency futures contracts. The Fund may also enter into futures contracts
based on financial indices, including any index of U.S. or Foreign Government
Securities. (Unless otherwise specified, futures contracts on interest rates,
financial indices, and foreign currency futures contracts are collectively
referred to as "Futures Contracts.") The Fund will utilize Futures Contracts
for hedging and non-hedging purposes, subject to applicable law. The Fund will
incur brokerage fees when it purchases and sells Futures Contracts, and it
will be required to make and maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS -- The Fund may purchase and write options on
interest rate and foreign currency futures contracts. The Fund may also enter
into options on futures contracts based on financial indices, including any
index of U.S. or Foreign Government Securities. (Unless otherwise specified,
options on financial indices futures contracts, interest rate futures
contracts and options on foreign currency futures contracts are collectively
referred to as "Options on Futures Contracts.") Such investment strategies
will be used for hedging and non-hedging purposes, subject to applicable law.
Put and call Options on Futures Contracts may be traded by the Fund in order
to protect against declines in the values of portfolio securities or against
increases in the cost of securities to be acquired. Purchases of Options on
Futures Contracts may present less risk in hedging the portfolios of the Fund
than the purchase or sale of the underlying Futures Contracts since the
potential loss is limited to the amount of the premium plus related
transaction costs. The writing of such options, however, does not present less
risk than the trading of Futures Contracts and will constitute only a partial
hedge, up to the amount of the premium received. In addition, if an option is
exercised, the Fund may suffer a loss on the transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY -- The Fund may enter into contracts for
the purchase or sale of a specific currency at a future date at a price set at
the time of the contract (a "Forward Contract"). The Fund will enter into
Forward Contracts for hedging and non-hedging purposes, including transactions
entered into for the purpose of profiting from anticipated changes in foreign
currency exchange rates. Transactions in Forward Contracts entered into for
hedging purposes may include forward purchases or sales of foreign currencies
for the purpose of protecting the dollar value of securities denominated in a
foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. The Fund may also enter into Forward Contracts
for "cross hedging" purposes, e.g., the purchase or sale of a Forward Contract
on one type of currency as a hedge against adverse fluctuations in the value
of a second type of currency. By entering into such transactions, however, the
Fund may be required to forgo the benefits of advantageous changes in exchange
rates. The Fund may also enter into transactions in Forward Contracts for
other than hedging purposes. For example, if the Adviser believes that the
value of a particular foreign currency will increase or decrease relative to
the value of the U.S. dollar, the Fund may purchase or sell such currency,
respectively, through a Forward Contract. If the expected changes in the value
of the currency occur, the Fund will realize profits which will increase its
gross income. Such transactions, however, may be considered speculative and
could involve significant risk of loss, as set forth below. The Fund has
established procedures which requires use of segregated assets or "cover" in
connection with the purchase and sale of such Contracts.
Forward Contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves
certain risks beyond those associated with transactions in the Futures and
Options contracts described above.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines
in the dollar value of portfolio securities, and against increases in the
dollar cost of securities to be acquired. As in the case of other types of
options, however, the writing of an option on foreign currency will constitute
only a partial hedge, up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the Fund's position,
it may forfeit the entire amount of the premium plus related transaction
costs. As in the case of Forward Contracts, certain options on foreign
currencies are traded over-the-counter and involve risks which may not be
present in the case of exchange-traded instruments.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk
factors described above. Additional information concerning risk factors can be
found under the caption "Certain Securities and Investment Techniques" in the
SAI.
FIXED INCOME SECURITIES: The net asset value of the shares of an open-end
investment company which may invest in fixed income securities changes as the
general levels of interest rates fluctuate. When interest rates decline, the
value of a fixed income portfolio can be expected to rise. Conversely, when
interest rates rise, the value of a fixed income portfolio can be expected to
decline. When and if available, the Fund may purchase fixed income securities
at a discount from face value. However, the Fund does not intend to hold such
securities to maturity for the purpose of achieving potential capital gains,
unless current yields on these securities remain attractive.
Although changes in the value of securities subsequent to their acquisition
are reflected in the net asset value of shares of the Fund, such changes will
not affect the income received by the Fund from such securities. However, the
dividends paid by the Fund, if any, will increase or decrease in relation to
the income received by the Fund from its investments, which would in any case
be reduced by the Fund's expenses before it is distributed to shareholders.
The Fund seeks to maintain a relatively high, stable dividend. At times, a
portion of the Fund's dividend may constitute a return of capital.
LOWER RATED FIXED INCOME SECURITIES: The Fund may invest in fixed income
securities rated Baa by Moody's or BBB by S&P or Fitch and comparable unrated
securities. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade securities.
The Fund may also invest up to 10% of its net assets in non-convertible fixed-
income securities rated Ba or lower by Moody's or BB or lower by S&P, Fitch or
Duff & Phelps and comparable unrated securities (commonly known as "junk
bonds"). No minimum rating standard is required by the Fund. These securities
are considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers
of such securities) and may involve greater volatility of price (especially
during periods of economic uncertainty or change) than securities in the
higher rating categories. However, since yields vary over time, no specific
level of income can ever be assured). These lower rated high yielding fixed
income securities generally tend to reflect economic changes and short-term
corporate and industry developments to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates, the market's perception of their credit
quality, and the outlook for economic growth). 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 market for these lower rated fixed
income securities may be less liquid than the market for investment grade
fixed income securities, and judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to the Fund but will be
reflected in the net asset value of shares of the Fund.
FOREIGN SECURITIES: The Fund intends to maintain a portfolio with a
significant investment in securities of non-U.S. issuers. Investing in foreign
securities or on foreign exchanges may present a greater degree of risk than
investing in domestic issuers. These risks include changes in currency rates,
exchange control regulations, governmental administration, economic or
monetary policy (in this country or abroad), war or expropriation. In
particular, the dollar value of portfolio securities of non-U.S. issuers
fluctuates with changes in market and economic conditions abroad and with
changes in relative currency values (when the value of the dollar increases as
compared to a foreign currency, the dollar value of a foreign-denominated
security decreases, and vice versa). Costs may be incurred in connection with
conversions between various currencies. Special considerations may also
include more limited information about foreign issuers, higher brokerage
costs, different accounting standards and thinner trading markets. Foreign
securities markets may also be less liquid, more volatile and less subject to
government supervision than in the United States. Investments in foreign
countries could be affected by other factors including confiscatory taxation
and potential difficulties in enforcing contractual obligations and could be
subject to extended settlement periods. Therefore, an investment in shares of
the Fund may be subject to a greater degree of risk than investments in other
investment companies which invest exclusively in domestic securities.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of
such securities, in the foreign currencies in which such securities are
denominated. In that event, the Fund may promptly convert such currencies into
dollars at the then current exchange rate. Under certain circumstances,
however, such as where the Adviser believes that the applicable exchange rate
is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the
Fund may hold such currencies for an indefinite period of time.
In addition, the Fund may be required to receive delivery of the foreign
currencies underlying options on foreign currencies it has entered into, and
the Fund may be required to receive delivery of the foreign currency
underlying forward foreign currency contracts it has entered into. This could
occur, for example, if an option written by the Fund is exercised or the Fund
is unable to close out a forward contract it has entered into. The Fund may
also hold foreign currency in anticipation of purchasing foreign securities.
The Fund may also elect to take delivery of the currencies underlying options
or forward contracts if, in the judgment of the Adviser, it is in the best
interest of the Fund to do so. In such instances as well, the Fund may
promptly convert the foreign currencies to dollars at the then current
exchange rate, or may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Fund
to risk of loss if such rates move in a direction adverse to the Fund's
position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities, and could
reduce the dollar value of interest of securities, and could reduce the dollar
value of interest or dividend payments received. In addition, the holding of
currencies could adversely affect the Fund's profit or loss on currency
options or forward contracts, as well as its hedging strategies.
EMERGING MARKETS SECURITIES: The risks of investing in foreign securities may
be intensified in the case of investments in emerging markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund is uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, in possible liability to the purchaser. Certain markets may require
payment for securities before delivery. Securities prices in emerging markets
can be significantly more volatile than in the more developed nations of the
world, reflecting the greater uncertainties of investing in less established
markets and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be
predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to
increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions or investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Fund will enter
into certain transactions in Futures Contracts, Options on Futures Contracts,
Forward Contracts and options for hedging purposes, such transactions do involve
certain risks. For example, a lack of correlation between the index or
instrument underlying an option, Futures Contract or Forward Contract and the
assets being hedged, or unexpected adverse price movements, could render the
Fund's hedging strategy unsuccessful and could result in losses. "Cross hedging"
transactions may involve greater correlation risks. In addition, there can be no
assurance that a liquid secondary market will exist for any contract purchased
or sold, and the Fund may be required to maintain a position until exercise or
expiration, which could result in losses. As noted, the Fund may also enter into
transactions in such instruments (except for options on foreign currencies) for
other than hedging purposes (subject to applicable law), including speculative
transactions, which involve greater risk. In entering into such transactions,
the Fund may experience losses which are not offset by gains on other portfolio
positions, thereby reducing its gross income. In addition, the markets for such
instruments may be extremely volatile from time to time, as discussed in the
SAI, which could increase the risks incurred by the Fund in entering into such
transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S.
exchanges regulated by the Commodity Futures Trading Commission (the "CFTC")
and on foreign exchanges. The securities underlying options and Futures
Contracts traded by the Fund may include domestic as well as foreign
securities. Investors should recognize that transactions involving foreign
securities or foreign currencies, and transactions entered into in foreign
countries, may involve considerations and risks not typically associated with
investing in U.S. markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
For example, the Fund may sell Futures Contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the Futures
transaction will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction. The risks
related to transactions in options, Futures Contracts, Options on Futures
Contracts and Forward Contracts entered into by the Fund are set forth in
greater detail in the SAI, which should be reviewed in conjunction with the
foregoing discussion.
AGENCY AND U.S. GOVERNMENT-RELATED SECURITIES: Agency Securities include
obligations issued or guaranteed by U.S. Government agencies, authorities or
instrumentalities, some of which are supported by the right of the issuer to
borrow from the U.S. Government, e.g., obligations of Federal Home Loan Banks;
some of which are backed only by the credit of the issuer itself, e.g.,
obligations of the Student Loan Marketing Association; and some of which are
supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations, e.g., obligations of the Federal National Mortgage
Association. No assurance can be given that the U.S. Government will provide
financial support to these entities because it is not obligated by law, in
certain instances, to do so. The primary types of Agency Securities in which
the Fund invests are listed in Appendix B.
U.S. Government-related Securities and Agency-related Securities (collectively,
"Government-related Securities") include, but are not limited to, CMOs, SMBS and
government backed trust certificates ("GBTs") (see "Certain Securities and
Investment Techniques -- Collateralized Mortgage Obligations and Multi-Class
Pass-Through Securities" and "-- Stripped Mortgage-Backed Securities"). GBTs and
certain CMOs, SMBS and other U.S. Government-related Securities are issued by
private entities, and are not directly guaranteed by the U.S. Government or any
U.S. Government agency. They are secured by the underlying collateral (U.S.
Government Securities or Agency Securities, in the case of the Fund) held by the
private issuer. Furthermore, no assurance can be given that the U.S. Government
will provide financial support to CMOs and SMBS issued by U.S. Government
agencies because it is not obligated by law, in certain instances, to do so.
NON-DIVERSIFICATION: The Fund has registered as a "non-diversified" investment
company. As a result, the Fund is limited as to the percentage of its assets
that may be invested in the securities of any one issuer only by its own
investment restrictions and the diversification requirements of the Internal
Revenue Code of 1986, as amended (the "Code"). U.S. Government Securities are
not subject to any investment limitation. Since the Fund may invest a
relatively high percentage of its assets in the obligations of a limited
number of issuers, the Fund may be more susceptible to any single economic,
political or regulatory occurrence.
PORTFOLIO TRADING: The Fund intends to manage its portfolio by buying and
selling securities to help attain its investment objective. This may result in
increases or decreases in the Fund's current income available for distribution
to the Fund's shareholders and in the holding by the Fund of debt securities
which sell at moderate to substantial premiums or discounts from face value.
The Fund will engage in portfolio trading if it believes a transaction, net of
costs (including custodian charges), will help in attaining its investment
objective. (See "Portfolio Transactions and Brokerage Commissions" in the
SAI.) For the fiscal year ended November 30, 1997, the Fund had a portfolio
turnover rate in excess of 100%. Transaction costs incurred by the Fund and
the realized capital gains and losses of the Fund may be greater than that of
a fund with a lesser portfolio turnover rate.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. (the "NASD") and such
other policies as the Trustees of the Fund may determine, the Adviser may
consider sales of shares of the Fund and of other investment company clients of
MFD, as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions. From time to time, the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to pay
a portion of the Fund's operating expenses (e.g., fees charged by the custodian
of the Fund's assets). For a further discussion of portfolio trading, see the
SAI.
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). 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.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993, as amended (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Steven E. Nothern, a Senior Vice President of the Adviser,
has been employed as a portfolio manager by the Adviser since 1989 and has been
one of the Fund's portfolio managers since 1992. Christopher D. Piros, a Senior
Vice President of the Adviser, has been employed as a portfolio manager by the
Adviser as a portfolio manager since 1992 and has been one of the Fund's
portfolio managers since January 31, 1996. For its services and facilities, the
Adviser receives a management fee, computed and paid monthly, in an amount equal
to 0.32% of the Fund's average daily net assets plus 5.65% of its daily gross
income for its then-current fiscal year.
For the Fund's fiscal year ended November 30, 1997, MFS, received management
fees under the Fund's Advisory Agreement of $1,274,191, equivalent on an
annualized basis to 0.76% of the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Institutional Trust, MFS Variable Insurance Trust, MFS/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., 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 $77.6 billion on behalf of approximately 2.9 million investor
accounts as of February 28, 1998. As of such date, the MFS organization managed
approximately $52.6 billion of assets invested in equity securities and
approximately $20.4 billion of assets invested in fixed income securities.
Approximately $4.0 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.) 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, Chief
Executive Officer 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.
W. Thomas London, Stephen E. Cavan, James R. Bordewick, Jr., Leslie J. Nanberg,
James O. Yost, Ellen Moynihan and Mark E. Bradley, 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 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 of 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.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A and B 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 two classes of shares to the general public (Class A
and B shares) which bear sales charges and distribution fees in different
forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at
net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
---------------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
- ------------------ -------------- ---------- -----------------
<S> <C> <C> <C>
Less than $100,000 ........................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000 .............. 4.00 4.17 3.20
$250,000 but less than $500,000 .............. 2.95 3.04 2.25
$500,000 but less than $1,000,000 ............ 2.20 2.25 1.70
$1,000,000 or more ........................... None** None** See Below**
- ------------
* Because of rounding in the calculation of offering price, actual sales charges may be more or less than those
calculated using the percentages above.
** A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge).
In the following 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 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:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
- --------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares, 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 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 or
partially 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:
CONTINGENT
YEAR OF REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
- -------------- --------------
First .................................................. 4%
Second ................................................. 4%
Third .................................................. 3%
Fourth ................................................. 3%
Fifth .................................................. 2%
Sixth .................................................. 1%
Seventh and following .................................. 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
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 Fund's 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 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
or partially 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 bears to the shareholder's total Class B shares not acquired
through reinvestment. The conversion of Class B shares to Class A shares is
subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversion will not constitute a
taxable event for federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class B shares would continue to be subject to higher expenses
than Class A shares for an indefinite period.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below
for further discussion of the CDSC.
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 information 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 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 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 and Class B shares. In addition, from time to
time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset
value of all of the Class B shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD,
at its expense, may provide additional commissions, compensation or
promotional incentives ("concessions") to dealers which sell 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.
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 shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units
and then exchanges into Class A shares subject to an initial sales charge of
an MFS Fund, the initial sales charge shall be due upon such exchange, but
will not be imposed with respect to any subsequent exchanges between such
Class A shares and Units with respect to shares on which the initial sales
charge has already been paid. In the event that a shareholder initially
purchases Units and then exchanges into Class A shares subject to a CDSC of an
MFS Fund, the CDSC period will commence upon such exchange, and the
applicability of the CDSC with respect to subsequent exchanges shall be
governed by the rules set forth above in this paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund 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 in gains or
losses to the shareholder. When a shareholder withdraws an amount from his
account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in
exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has
cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally
means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the
manner set forth below under the caption "Signature Guarantee." In addition,
in some cases "good order" will require the furnishing of additional
documents. The Shareholder Servicing Agent may make certain de minimis
exceptions to the above requirements for redemption. Within seven days after
receipt of a redemption request in "good order" by the Shareholder Servicing
Agent, the Fund will make payment in cash of the net asset value of the shares
next determined after such redemption request was received, reduced by the
amount of any applicable CDSC described above and the amount of any income tax
required to be withheld, except during any period in which the right of
redemption is suspended or date of payment is postponed because the Exchange
is closed or trading on such Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone
redemption privilege must so elect on their Account Application, designate
thereon a bank and account number to receive the proceeds of such redemption,
and sign the Account Application Form with the signature(s) guaranteed in the
manner set forth below under the caption "Signature Guarantee." The proceeds
of such a redemption, reduced by the amount of any applicable CDSC and the
amount of any income tax required to be withheld, are mailed by check to the
designated account, without charge, if the redemption proceeds do not exceed
$1,000, and are wired in federal funds to the designated account if the
redemption proceeds exceed $1,000. If a telephone redemption request is
received by the Shareholder Servicing Agent by the close of regular trading on
the Exchange on any business day, shares will be redeemed at the closing net
asset value of the Fund on that day. Subject to the conditions described in
this section, proceeds of a redemption are normally mailed or wired on the
next business day following the date of receipt of the order for redemption.
The Shareholder Servicing Agent will not be responsible for any losses
resulting from unauthorized telephone transactions if it follows reasonable
procedures designed to verify the identity of the caller. The Shareholder
Servicing Agent will request personal or other information from the caller,
and will normally also record calls. Shareholders should verify the accuracy
of confirmation statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase
order with his dealer, who may charge the shareholder a fee. IF THE DEALER
RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
EXCHANGE AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME
DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY,
REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD.
REDEMPTION BY CHECK: Only Class A shares may be redeemed by check. A
shareholder owning Class A shares of the Fund may elect to have a special
account with State Street Bank and Trust Company (the "Bank") for the purpose
of redeeming Class A shares from his or her account by check. The Bank will
provide each Class A shareholder, upon request, with forms of checks drawn on
the Bank. Only shareholders having accounts in which no share certificates
have been issued will be permitted to redeem shares by check. Checks may be
made payable in any amount not less than $500. Shareholders wishing to avail
themselves of this redemption by check privilege should so request on their
Account Application, must execute signature cards (for additional information,
see the Account Application) with signature guaranteed in the manner set forth
under the caption "Signature Guarantee" below, and must return any Class A
share certificates issued to them. Additional documentation will be required
from corporations, partnerships, fiduciaries or other such institutional
investors. All checks must be signed by the shareholder(s) of record exactly
as the account is registered before the Bank will honor them. The
shareholders of joint accounts may authorize each shareholder to redeem by
check. The check may not draw on monthly dividends which have been declared
but not distributed. SHAREHOLDERS WHO PURCHASE CLASS A SHARES BY CHECK
(INCLUDING CERTIFIED CHECKS OR CASHIER'S CHECKS) MAY WRITE CHECKS AGAINST
THOSE SHARES ONLY AFTER THEY HAVE BEEN ON THE FUND'S BOOKS FOR 15 DAYS. WHEN
SUCH A CHECK IS PRESENTED TO THE BANK FOR PAYMENT, A SUFFICIENT NUMBER OF FULL
AND FRACTIONAL SHARES WILL BE REDEEMED TO COVER THE AMOUNT OF THE CHECK, ANY
APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD. IF
THE AMOUNT OF THE CHECK, PLUS ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME
TAX REQUIRED TO BE WITHHELD IS GREATER THAN THE VALUE OF CLASS A SHARES HELD
IN THE SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE RETURNED UNPAID, AND THE
SHAREHOLDER MAY BE SUBJECT TO EXTRA CHARGES. TO AVOID DISHONOR OF CHECKS DUE
TO FLUCTUATIONS IN ACCOUNT VALUE, SHAREHOLDERS ARE ADVISED AGAINST REDEEMING
ALL OR MOST OF THEIR ACCOUNT BY CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A
FUND ACCOUNT BECAUSE WHEN THE CHECK IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW
THE EXACT TOTAL VALUE OF THE ACCOUNT ON THE DAY THE CHECK CLEARS. There is
presently no charge to the shareholder for the maintenance of this special
account or for the clearance of any checks, but the Fund and the Bank reserve
the right to impose such charges or to modify or terminate the redemption by
check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A 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 B shares purchased on or after January 1, 1993 will be aggregated on a
calendar month basis -- all transactions made during a calendar month,
regardless of when during the month they have occurred, will age one year at
the close of business on the last day of such month in the following calendar
year and each subsequent year. For Class B shares of the Fund purchased prior
to January 1, 1993, transactions will be aggregated on a calendar year basis
- -- all transactions made during a calendar year, regardless of when during the
year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases
exceeds the sum of the six calendar year aggregations (12 months in the case
of purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed
without charge ("Free Amount"). Moreover, no CDSC is ever assessed on
additional shares acquired through the automatic reinvestment of dividends or
capital gain distributions ("Reinvested Shares"). Therefore, at the time of
redemption of a particular class, (i) any Free Amount is not subject to the
CDSC and (ii) the amount of the redemption equal to the then-current value of
Reinvested Shares is not subject to the CDSC, but (iii) any amount of the
redemption in excess of the aggregate of the then-current value of Reinvested
Shares and the Free Amount is subject to a CDSC. The CDSC will first be
applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days
of the redemption pursuant to the Reinstatement Privilege. If the shares
credited for any CDSC paid are then redeemed within six years of the initial
purchase in the case of Class B shares or within 12 months of the initial
purchase for certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to
all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. 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 and Class B 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.
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 certain 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
either class of shares to which the Distribution Plan relates (i.e., Class A
and Class B shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom
such dealer is the dealer or holder of record. MFD may from time to time
reduce the amount of the service fees paid for shares sold prior to a certain
date. Service fees may be reduced for a dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having an aggregate net
asset value at or above a certain dollar level. Dealers may from time to time
be required to meet certain criteria in order to receive service fees. MFD or
its affiliates are entitled to retain all service fees payable under 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 Plans, 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 of the
Distribution Plan that are unique to each class of shares, as described below.
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 commission to dealers with respect to
purchases of $1 million or more and certain purchases by 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).
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A and Class B
distribution and service fees for its current fiscal year are 0.00% and 1.00%
per annum, respectively. Payment of the 0.10% per annum Class A distribution
fee will commence on such date as the Trustees of the Trust may determine.
Payment of the 0.25% per annum Class A service fee will commence on the date
that the net assets attributable to Class A shares first equal or exceed $40
million.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a monthly basis. In determining the net
investment income available for distributions, the Fund may rely on
projections of its anticipated net investment income, including short-term
capital gains from the sales of securities or other assets and premiums from
options written, over a longer term, rather than its actual net investment
income for the period. If the Fund earns less than projected, or otherwise
distributes more than its earnings for the year, a portion of the distribution
may constitute a return of capital. Distributions from short-term capital
gains, if any, from the sale of securities or other assets, and of all or a
portion of premiums received from options (including premiums received on
options written and expected to be earned over the near term), are expected to
be made monthly. In addition, the Fund will make one or more distributions
during the calendar year to its shareholders from any long-term capital gains.
Shareholders may elect to receive dividends and capital gain distributions in
either cash or additional shares of the same class with respect to which a
distribution is made. See "Tax Status" and "Shareholder Services --
Distribution Options" below. Distributions paid by the Fund with respect to
Class A shares will generally be greater than those paid with respect to Class
B shares because expenses attributable to Class B shares will generally be
higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust
for federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (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 and 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. Shareholders may not have
to pay state or local taxes on dividends derived from interest on U.S.
Government obligations. Investors should consult with their tax advisers in
this regard. Shortly after the end of each calendar year, each shareholder
will be sent a statement setting forth the federal income tax status of all
dividends and distributions for that 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), the portion, if
any, representing a return of capital (which is generally free of current
taxes but which results in a basis reduction), the portion representing
interest on U.S. Government obligations, and the amount, if any, of federal
income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion
of the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (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
additional information regarding backup withholding of federal income tax and
should consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the
assets attributable to that class and dividing the difference by the number of
shares of the class outstanding. Assets in the Fund's portfolio are valued on
the basis of their current values or otherwise at their fair values, as
described in the SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value per share of
each class of shares is effective for orders received in "good order" 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 three series of the Trust, has two classes of shares which it
offers to the general public entitled Class A and Class B Shares of Beneficial
Interest (without par value). The Fund also has a class of shares which it
offers exclusively to certain institutional investors, entitled Class I
shares. The Trust has reserved the right to create and issue additional
classes and series of shares, in which case each class of shares of a series
would participate equally in the earnings, dividends and assets attributable
to that class of that particular series. Shareholders are entitled to one vote
for each share held and shares of each series would be entitled to vote
separately to approve investment advisory agreements or changes in investment
restrictions, but shares of all series would vote together in the election of
Trustees and selection of accountants. Additionally, each class of shares of a
series will vote separately on any material increases in the fees under 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 matters. The Trust does not intend to hold annual
shareholder meetings. The Declaration of Trust provides that a Trustee may be
removed from office in certain instances (see "Description of Shares, Voting
Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest
in the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
set forth above in "Purchases -- Conversion of Class B shares"). Shares are
fully paid and non-assessable. Should the Fund be liquidated, shareholders of
each class are entitled to share pro rata in the net assets allocable to that
class available for distribution to shareholders. Shares will remain on
deposit with the Shareholder Servicing Agent and certificates will not be
issued except in connection with pledges and assignments and in certain other
limited circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g., fidelity bonding errors and omissions insurance)
existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote
fund rankings in the relevant fund category from various sources, such as the
Lipper Analytical Securities Corporation and Wiesenberger Investment Companies
Service. Yield quotations are based on the annualized net investment income
per share allocated to each class of the Fund over a 30-day period stated as a
percent of the maximum public offering price of that class on the last day of
that period. Yield calculations for Class B shares assume no CDSC is paid.
The current distribution rate for each class is generally based upon the total
amount of dividends per share paid by the Fund to shareholders of that class
during the past twelve months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of
such period. Current distribution rate calculations for Class B shares assume
no CDSC is paid. The current distribution rate differs from the yield
calculation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains, and return of invested capital, and is calculated
over a different period of time. Total rate of return quotations will reflect
the average annual percentage change over stated periods in the value of an
investment in each class of shares of the Fund made at the maximum public
offering price of the shares of that class with all distributions reinvested
and which will give effect to the imposition of any applicable CDSC assessed
upon redemptions of the Fund's Class B shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of
a CDSC, and which will thus be higher. The Fund offers multiple classes of
shares which were initially offered for sale to, and purchased by, the public
on different dates (the "class inception date"). The calculation of total rate
of return for a class of shares which has a later class inception date than
another class of shares of the Fund is based both on (i) the performance of
the Fund's newer class from its inception date and (ii) the performance of the
Fund's oldest class from its inception date up to the class inception date of
the newer class. 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. For further
information about the Fund's performance for the fiscal year ended November
30, 1997, please see the Fund's Annual Report. A copy of the Annual Report may
be obtained without charge by contacting the Shareholder Servicing Agent (see
back cover for address and phone number). In addition to information provided
in shareholder reports, the Fund may, in its discretion, from time to time,
make a list of all or a portion of its holdings available to investors upon
request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of the Fund should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS Each shareholder will receive confirmation
statements showing the transaction activity in his account. Cancelled checks,
if any, will be sent to shareholders monthly. At the end of each calendar
year, each shareholder will receive income tax information regarding
reportable dividends and capital gain distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions (except as provided
below) reinvested in additional shares;
-- Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time to time make
distributions from short-term capital gains on a monthly basis, and to the
extent such gains are distributed monthly, they shall be paid in cash; any
remaining short-term capital gains not so distributed shall be reinvested in
additional shares.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Checks for dividends and capital
gains distributions in amounts less than $10 will automatically be reinvested
in additional Shares of the Fund. If a shareholder has elected to receive
dividends and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record 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 dividend or distribution. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A
shares of the Fund alone or in combination with Class B and Class C shares of
any other MFS Funds or the MFS Fixed Fund (a bank collective investment fund)
within a 13-month period (or 36-month period for purchases of $1 million or
more), the shareholder may obtain such shares at the same reduced sales charge
as though the total quantity were invested in one lump sum, subject to escrow
agreements and the appointment of an attorney for redemptions from the escrow
amount if the intended purchases are not completed, by completing the Letter
of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, B and C
shares of that shareholder in the MFS Funds or MFS Fixed Fund reaches a
discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the
same class of another MFS Fund. Furthermore, distributions made by the Fund
may be automatically invested at net asset value (and without any applicable
CDSC) in shares of the same class of another MFS Fund, if shares of such Fund
are available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic
payments, based upon the value of his account. Each payment under a Systematic
Withdrawal Plan ("SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B shares in any year
pursuant to a SWP will not be subject to a CDSC and are generally limited to
10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account 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.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund or may exchange their shares for the same class of
shares of the other MFS Funds under the Automatic Exchange Plan, a dollar cost
averaging program. The Automatic Exchange Plan provides for automatic monthly
or quarterly exchanges of funds from the shareholder's account in an MFS Fund
for investment in the same class of shares of other MFS Funds selected by the
shareholder if such fund is available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to 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 a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class B
shares.
TAX-DEFERRED RETIREMENT PLANS Shares of the Fund may be purchased by all types
of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k) plans,
403(b) plans and other corporate pension and profit-sharing plans. Investors
should consult with their tax adviser before establishing any of the tax-
deferred retirement plans described above.
--------------------
The Fund's SAI, dated April 1, 1998, contains more detailed information about
the Trust and the Fund including, but not limited to, information related to
(i) investment objective, policies and restrictions, including the purchase
and sale of options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies, (ii) the Trustees, officers and
investment adviser, (iii) portfolio trading, (iv) the Fund's shares,
including rights and liabilities of shareholders, (v) tax status of dividends
and distributions, (vi) the Distribution Plan, (vii) the method used to
calculate yield, current distribution rate and total rate of return quotations
and (viii) various services and privileges provided by the Fund for the
benefit of its shareholders, including additional information with respect to
the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the
contingent deferred sales charge ("CDSC") for Class A shares is waived
(Section II), and the CDSC for Class B shares is waived (Section III). 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 shares, as applicable, is
waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the MFS Family of Funds
("MFS Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of
assets of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
o Officers, eligible directors, employees (including retired
employees) and agents of Massachusetts Financial Services Company
("MFS"), Sun Life Assurance Company of Canada ("Sun Life") or any of
their subsidiary companies;
o Trustees and retired trustees of any investment company for which
MFD serves as distributor;
o Employees, directors, partners, officers and trustees of any sub-
adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or
other retirement plans for the sole benefit of such persons,
provided the shares are not resold except to the MFS Fund which
issued the shares; and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of
a shareholder's account. See "Redemptions and Repurchases -- General
-- Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
o Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant
(excluding, however, a partial or other termination of the 401(a) or
ESP Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the 401(a) or ESP Plan
sponsor subscribes to the MFS FUNDamental 401(k) Plan or another
similar recordkeeping system made available by the Shareholder
Servicing Agent; and
o Distributions from a 401(a) or ESP Plan that has invested its assets
in one or more of the MFS Funds for more than 10 years from the
later to occur of: (i) January 1, 1993 or (ii) the date such Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the
Plan's shares in all MFS Funds (i.e., all the assets of the 401(a)
or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested
by the 401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years equals
50% or more of the total value of the 401(a) or ESP Plan's assets in
the MFS Funds, in which case the sales charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares
transferred:
o To an IRA rollover account where any sales charges with respect to
the shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple
accounts maintained by 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
o Shares acquired pursuant to repayments by retirement plan
participants of loans from 401(a) or ESP Plans with respect to which
such Plan or its sponsoring organization subscribes to the MFS
FUNDamental 401(k) Program or the MFS Recordkeeper Plus Program (but
not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A
shares and the contingent deferred sales charge imposed on certain
redemptions of Class A shares are waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include
a requirement that such shares be sold for the sole benefit of
clients participating in a "wrap" account, mutual fund "supermarket"
account or a similar program under which such clients pay a fee to
such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts whose third
party administrators, or dealers have entered into an administrative
services agreement with MFD or one of its affiliates to perform
certain administrative services, subject to certain operational and
minimum size requirements specified from time to time by MFD or one
or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares
of Class A or Class B distributions which constitute required
withdrawals from qualified retirement plans.
Shares redeemed on account of distributions made under the following
circumstances:
IRA'S
o Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has
attained the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a Plan.
ESP PLANS AND SRO PLANS
o 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)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by
the shareholder in the Eligible Funds subject to such requirements
as may be established from time to time by MFD (for a schedule of
the amount of commissions paid by MFD to the dealer on such
investments, see "Purchases -- Class A Shares -- Purchases Subject
to a CDSC" in the Prospectus). The Eligible Funds are all funds
included in the MFS Family of Funds, except for Massachusetts
Investors Trust, Massachusetts Investors Growth Stock Fund, MFS
Municipal Bond Fund, MFS Municipal Limited Maturity Fund, MFS Money
Market Fund, MFS Government Money Market Fund and MFS Cash Reserve
Fund.
5. BANK TRUST DEPARTMENTS AND LAW FIRMS
o Shares acquired by certain bank trust departments or law firms
acting as trustee or manager for trust accounts which have entered
into an administrative services agreement with MFD and are acquiring
such shares for the benefit of their trust account clients.
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs
where the redemption is made pursuant to Section 72(t) of the
Internal Revenue Code of 1986, as amended) of the account value at
the time of establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification form
is required to be submitted to 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
o Distributions made on or after the IRA owner or the 401(a), ESP or
SRO Plan participant, as applicable, has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SALARY REDUCTION ON SIMPLIFIED EMPLOYEE REDUCTION PLANS ("SAR-SEP
PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 years old, but only with respect to the
minimum distribution under applicable Code rules;
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED
BY U.S. GOVERNMENT AGENCIES, AUTHORITIES
OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities
of the U.S. Government are established under the authority of an act of
Congress and include, but are not limited to, the Tennessee Valley Authority,
the Bank for Cooperatives, the Farmers Home Administration, Federal Home Loan
Banks, Federal Intermediate Credit Banks and Federal Land Banks, as well as
those listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds
issued by a cooperatively owned nationwide system of banks and associations
supervised by the Farm Credit Administration. These bonds are not guaranteed
by the U.S. Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing Administration
of the U.S. Government and are fully and unconditionally guaranteed by the
U.S. Government.
GNMA CERTIFICATES -- are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which
represent a partial ownership interest in a pool of mortgage loans issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations. Each mortgage loan included in the pool is also insured or
guaranteed by the Federal Housing Administration, the Veterans Administration
or the Farmers Home Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS -- are bonds issued and
guaranteed by the Federal Home Loan Mortgage Corporation and are not
guaranteed by the U.S. Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S.Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued and guaranteed
by the Federal National Mortgage Association and are not guaranteed by the
U.S. Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and notes issued
and guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES -- are debentures backed by the
Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
SOME OF THE FOREGOING OBLIGATIONS, SUCH AS TREASURY BILLS AND GNMA PASS-
THROUGH CERTIFICATES, ARE SUPPORTED BY THE FULL FAITH AND CREDIT OF THE U.S.
GOVERNMENT; OTHERS, SUCH AS SECURITIES OF FNMA, BY THE RIGHT OF THE ISSUER TO
BORROW FROM THE U.S. TREASURY; STILL OTHERS, SUCH AS BONDS ISSUED BY SLMA, ARE
SUPPORTED ONLY BY THE CREDIT OF THE INSTRUMENTALITY. NO ASSURANCE CAN BE GIVEN
THAT THE U.S. GOVERNMENT WILL PROVIDE FINANCIAL SUPPORT TO INSTRUMENTALITIES
SPONSORED BY THE U.S. GOVERNMENT AS IT IS NOT OBLIGATED BY LAW, IN CERTAIN
INSTANCES, TO DO SO.
ALTHOUGH THIS LIST INCLUDES A DESCRIPTION OF THE PRIMARY TYPES OF U.S.
GOVERNMENT AGENCY, AUTHORITIES OR INSTRUMENTALITY OBLIGATIONS IN WHICH THE
FUND INTENDS TO INVEST, THE FUND MAY INVEST IN OBLIGATIONS OF U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES OTHER THAN THOSE LISTED ABOVE.
<PAGE>
APPENDIX C
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their opinions
as to the quality of various debt instruments. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
debt instruments with the same maturity, coupon and rating may have different
yields while debt instruments of the same maturity and coupon with different
ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. an application for rating was not received or accepted;
2. the issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy;
3. there is a lack of essential data pertaining to the issue or issuer;
and
4. the issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: 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
AAA: Highest credit quality. AAA ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB: Speculative. BB ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C: High default risk. Default is a real possibility, Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. 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 possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/
or interest payments.
DP: Preferred stock with dividend arrearages.
DUFF & PHELPS SHORT-TERM RATINGS
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
APPENDIX D
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN
U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in
a bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in
order to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P, and
issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment
capacity will normally be evidenced by the following characteristics: (1)
leading market positions in well established industries; (2) high rates of
return on funds employed; (3) conservative capitalization structure with
moderate reliance on debt and ample asset protection; (4) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation; and (5) well established access to a range of financial markets
and assured sources of alternate liquidity.
<PAGE>
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Principal Underwriter
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend
Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
MII-1-4/98/97M 05/205
<PAGE>
[GRAPHIC OMITTED]
MFS(R) INTERMEDIATE STATEMENT OF
INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) April 1, 1998
- ------------------------------------------------------------------------------
Page
----
1. Definitions .................................................... 2
2. Certain Securities and Investment Techniques ................... 2
3. Investment Restrictions ........................................ 11
4. Management of the Fund ......................................... 12
Trustees .................................................... 12
Officers .................................................... 12
Trustee Compensation Table .................................. 13
Investment Adviser .......................................... 13
Administrator ............................................... 14
Custodian ................................................... 14
Shareholder Servicing Agent ................................. 14
Distributor ................................................. 14
5. Portfolio Transactions and Brokerage Commissions ............... 15
6. Shareholder Services ........................................... 16
Investment and Withdrawal Programs .......................... 16
Exchange Privilege .......................................... 18
Tax-Deferred Retirement Plans ............................... 19
7. Tax Status ..................................................... 19
8. Determination of Net Asset Value; Performance Information ...... 20
9. Distribution Plan .............................................. 22
10. Description of Shares, Voting Rights and Liabilities ........... 23
11. Independent Auditors and Financial Statements .................. 24
Appendix A ..................................................... A-1
MFS INTERMEDIATE INCOME FUND
A Series of MFS Series Trust II
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI"), as amended or supplemented
from time to time, sets forth information which may be of interest to investors
but which is not necessarily included in the Fund's Prospectus, dated April 1,
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 Intermediate Income Fund, a non-diversified
series of MFS Series Trust II (the "Trust"), a
Massachusetts business trust. Until June 3, 1993,
the Fund was known as MFS Lifetime Intermediate
Income Fund and was known as Lifetime Intermediate
Income Trust prior to August 3, 1992. The Fund
became a series of the Trust on June 3, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Fund, dated April 1, 1998, as
amended or supplemented from time to time.
2. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's securities transactions and investment
techniques are described in greater detail below.
LENDING OF SECURITIES
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by collateral
in cash, U.S. Government securities or an irrevocable letter of credit
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned. The Fund would also receive a fee from the
borrower or 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 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 assets.
"WHEN-ISSUED" SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have 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 SEC policies,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, the Fund may have to sell assets which have been set
aside in order to meet redemptions. Also, if the Fund determines it is necessary
to sell the "when-issued" or "forward delivery" securities before delivery, it
may incur a loss because of market fluctuations since the time the commitment to
purchase such securities was made and any gain would not be tax-exempt. When the
time comes to pay for "when-issued" or "forward delivery" securities, the Fund
will meet its obligations from the then-available cash flow on the sale of
securities, or, although it would not normally expect to do so, from the sale of
the "when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than the Fund's payment obligation).
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund may enter into repurchase agreements
with sellers who are member firms (or subsidiaries thereof) of the Exchange,
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that the Fund purchases and holds
through its agent are U.S. Government securities, the values, including accrued
interest, of which are equal to or greater than the repurchase price agreed to
be paid by the seller. The repurchase price may be higher than the purchase
price, the difference being income to the Fund, or the purchase and repurchase
prices may be the same, with interest at a standard rate due to the Fund
together with the repurchase price on repurchase. In either case, the income to
the Fund is unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
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 the seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value, including
accrued interest, of the securities (which are marked to market every business
day) is required to be greater than the repurchase price, and the Fund has the
right to make margin calls at any time if the value of the securities falls
below the agreed upon collateral.
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 principal and
interest by the difference between the current sales price and the lower price
for the future purchase (often referred to as the "drop") as well as by the
interest earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
STRIPPED MORTGAGE-BACKED SECURITIES
As described in the Prospectus, the Fund may invest a portion of its assets in
stripped mortgage-backed securities ("SMBS") which are derivative multiclass
mortgage securities issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in mortgage loans,
including savings and loan institutions, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of Mortgage Assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest while the other class will
receive all of the principal. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities. The market value of the class
consisting primarily or entirely of principal payments generally is unusually
volatile in response to changes in interest rates.
FOREIGN SECURITIES
The Fund may invest up to 50% of its net assets in Foreign Government Securities
of issuers considered stable by the Adviser. As discussed in the Prospectus,
investing in foreign securities generally presents a greater degree of risk than
investing in domestic securities due to possible exchange rate fluctuations,
less publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war or expropriation. As a result of
its investments in foreign securities, the Fund may receive interest or dividend
payments, or the proceeds of the sale or redemption of such securities, in the
foreign currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the Fund
may hold such currencies for an indefinite period of time. The Fund may also
hold foreign currency in anticipation of purchasing foreign securities. While
the holding of currencies will permit the Fund to take advantage of favorable
movements in the applicable exchange rate, such strategy also exposes the Fund
to risk of loss if exchange rates move in a direction adverse to the Fund's
position. Such losses could reduce any profits or increase any losses sustained
by the Fund from the sale or redemption of securities and could reduce the
dollar value of interest or dividend payments received.
SWAPS AND RELATED TRANSACTIONS -- The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets 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 to the excess, if any, of the Fund's accrued obligations under the
swap agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net basis,
it will maintain cash or liquid assets with a value equal to the full amount of
the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of the swap agreement would
be likely to decline, potentially resulting in losses. If the counterparty
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The Fund anticipates that it will
be able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may write covered
call and put options and purchase call and put options on securities. Call and
put options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration segregated by the Fund) 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 are 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 is equal to or greater than the
exercise price of the put written or where the exercise price of the put held is
less than the exercise price of the put written if liquid assets representing
the difference are segregated by the Fund. Put and call options written by the
Fund may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by liquid assets. Such transactions permit
the Fund to generate additional premium income, which will partially offset
declines in the value of portfolio securities or increases in the cost of
securities to be acquired. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other investments of the Fund, provided that another
option on such security is not written. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction in connection with the option prior to or
concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option written by the Fund is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than the
premium paid for the original purchase. Conversely, the Fund will suffer a loss
if the premium paid or received in connection with a closing transaction is more
or less, respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option previously written by the
Fund is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at- the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will decline moderately during the option period. Buy- and-write
transactions using out-of-the-money call options may be used when it is expected
that the premiums received from writing the call option plus the appreciation in
the market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, the Fund's maximum gain
will be the premium received by it for writing the option, adjusted upwards or
downwards by the difference between the Fund's purchase price of the security
and the exercise price, less related transaction costs. If the options are not
exercised and the price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, the Fund may elect
to close the position or retain the option until it is exercised, at which time
the Fund will be required to take delivery of the security at the exercise
price; the Fund's return will be the premium received from the put option minus
the amount by which the market price of the security is below the exercise
price, which could result in a loss. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in the same market environments
that call options are used in equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs, the
call will likely be exercised and the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be effective,
therefore, only where the price of the security remains stable and neither the
call nor the put is exercised. In those instances where one of the options is
exercised, the loss on the purchase or sale of the underlying security may
exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price above its
then current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will not
be undertaken by the Fund solely for hedging purposes, and could involve certain
risks which are not present in the case of hedging transactions. Moreover, even
where options are written for hedging purposes, such transactions constitute
only a partial hedge against declines in the value of portfolio securities or
against increases in the value of securities to be acquired, up to the amount of
the premium.
The Fund may purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, the Fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. If such increase
occurs, the call option will permit the Fund to purchase the securities at the
exercise price, or to close out the options at a profit. The premium paid for
the call option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
In certain instances, the Fund may enter into options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of each
such option. Like other types of options, these transactions, which may be
referred to as "reset" options or "adjustable strike" options, grant the
purchaser the right to purchase (in the case of a "call") or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of options, however, the price at which the underlying
security may be purchased or sold under a "reset" option is determined at
various intervals during the term of the option, and such price fluctuates from
interval to interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" option, at the time of
exercise, may be less advantageous to the Fund than if the strike price had been
fixed at the initiation of the option. In addition, the premium paid for the
purchase of the option may be determined at the termination, rather than the
initiation, of the option. If the premium is paid at termination, the Fund
assumes the risk that (i) the premium may be less than the premium which would
otherwise have been received at the initiation of the option because of such
factors as the volatility in yield of the underlying Treasury security over the
term of the option and adjustments made to the strike price of the option, and
(ii) the option purchaser may default on its obligation to pay the premium at
the termination of the option.
YIELD CURVE OPTIONS -- The Fund may also enter into options on the yield
"spread", or yield differential, between two U.S. Government Securities in
transactions referred to as "yield curve" options. In contrast to other types of
options, a yield curve option is based on the difference between the yields of
designated securities or indices of securities, rather than the price of the
individual securities, and is settled through cash payments. Accordingly, a
yield curve option is profitable to the holder if this differential widens (in
the case of a call) or narrows (in the case of a put), regardless of whether the
yields of the underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the yield
spread between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an effort to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities or indices. The trading of yield curve options is subject
to all of the risks associated with the trading of other types of options. In
addition, however, such options present risk of loss even when the yield of one
of the underlying securities or indices remains constant, if the yield spread
moves in a direction or to an extent which was not anticipated. Yield curve
options written by the Fund will be "covered." A call (or put) option written by
the Fund is covered if the Fund holds another call (or put) option on the yield
spread between the same two securities or indices and segregates liquid assets
sufficient to cover the Fund's net liability under the two options. Therefore,
the Fund's maximum liability for such a covered option is the difference between
the amount of the Fund's liability under the option written by the Fund less the
value of the option held by the Fund. Yield curve options may also be covered in
such other manner as may be in accordance with the requirements of the counter
party with which the option is traded and applicable laws and regulations. Yield
curve options are traded over-the-counter and because they have been only
recently introduced, established trading markets for these securities have not
yet developed. Because these securities are traded over-the-counter, the SEC has
taken the position that yield curve options are illiquid and, therefore, cannot
exceed the SEC liquidity ceiling. See "Policies on the Use of Futures, Options
and Options on Futures Contracts" below for a discussion of the policies the
Adviser intends to follow to limit the Fund's investment in these securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may enter into
interest rate futures contracts and/or foreign currency futures contracts. The
Fund may also enter into futures contracts based on financial indices including
any index of U.S. or Foreign Government Securities (as defined in the
Prospectus). (Unless otherwise specified, futures contracts on financial
indices, interest rate and foreign currency futures contracts are collectively
referred to as "Futures Contracts.") Such investment strategies will be used for
hedging purposes and for non-hedging purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or foreign currency, or
for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement date on which, in the case of the majority of interest rate
and foreign currency futures contracts, the fixed income security or currency is
delivered by the seller and paid for by the purchaser, or on which, in the case
of certain interest rate and foreign currency futures contracts, the difference
between the price at which the contract was entered into and the contract's
closing value is settled between the purchaser and seller in cash. Futures
Contracts differ from options in that they are bilateral agreements, with both
the purchaser and the seller equally obligated to complete the transaction.
Futures Contracts call for settlement only on the expiration date and cannot be
"exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions in the
Futures Contract more or less valuable -- a process known as "marking to the
market."
Interest rate futures contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on the Fund's current or intended
investments in fixed income securities. For example, if the Fund owned long-term
bonds and interest rates were expected to increase, the Fund might enter into
interest rate futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling some of the long-term bonds in the
Fund's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Fund's interest
rate futures contracts would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds the
Fund could protect itself against the effects of the anticipated rise in the
value of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and the Fund's cash reserves could then be
used to buy long-term bonds on the cash market. The Fund could accomplish
similar results by selling bonds with long maturities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of
interest rate futures contracts as a hedging technique allows the Fund to hedge
its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, the Fund may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities to
be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. The Fund may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may
purchase and write options to buy or sell futures contracts in which it may
invest ("Options on Futures Contracts"). Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by the purchaser
or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the Fund's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodities Futures Trading Commission (the "CFTC") and the performance
guarantee of the exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if liquid assets
representing the difference are 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 where the
exercise price of the put held is less than the exercise price of the put
written if liquid assets representing the difference are segregated by the Fund.
Put and call Options on Futures Contracts may also be covered in such other
manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Upon the exercise of a
call Option on a Futures Contract written by the Fund, the Fund will be required
to sell the underlying Futures Contract which, if the Fund has covered its
obligation through the purchase of such Contract, will serve to liquidate its
futures position. Similarly, where a put Option on a Futures Contract written by
the Fund is exercised, the Fund will be required to purchase the underlying
Futures Contract which, if the Fund has covered its obligation through the sale
of such Contract, will close out its futures position.
The writing of a call Option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. If
the futures price at expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put Option on a Futures
Contract constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures Contracts
may to some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes instead
of purchasing or selling the underlying Futures Contracts. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, the Fund
could, in lieu of selling Futures Contracts, purchase put options thereon. In
the event that such decrease occurs, it may be offset, in whole or part, by a
profit on the option. Conversely, where it is projected that the value of
securities to be acquired by the Fund will increase prior to acquisition, due to
a market advance or changes in interest or exchange rates, the Fund could
purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward foreign currency
exchange contracts ("Forward Contracts") for hedging and non-hedging purposes.
Forward Contracts may be used for hedging to attempt to minimize the risk to the
Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies. The Fund intends to enter into Forward Contracts for hedging
purposes similar to those described above in connection with foreign currency
futures contracts. In particular, a Forward Contract to sell a currency may be
entered into in lieu of the sale of a foreign currency futures contract where
the Fund seeks to protect against an anticipated increase in the exchange rate
for a specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into a
Forward Contract to purchase a given currency to protect against a projected
increase in the dollar value of securities denominated in such currency which
the Fund intends to acquire. The Fund also may enter into a Forward Contract in
order to assure itself of a predetermined exchange rate in connection with a
security denominated in a foreign currency. In addition, the Fund may enter into
Forward Contracts for "cross hedging" purposes; e.g., the purchase or sale of a
Forward Contract on one type of currency as a hedge against adverse fluctuations
in the value of a second type of currency.
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forego all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates. The Fund does not intend, in most instances, to hold Forward Contracts
entered into until maturity, at which time it would be required to deliver or
accept delivery of the underlying currency, but will usually seek to close out
positions in such contracts by entering into offsetting transactions, which will
serve to fix the Fund's profit or loss based upon the value of the contracts at
the time the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other than
hedging purposes, which present greater profit potential but also involve
increased risk. For example, the Fund may purchase a given foreign currency
through a Forward Contract if, in the judgment of the Adviser, the value of such
currency is expected to rise relative to the U.S. dollar. Conversely, the Fund
may sell the currency through a Forward Contract if the Adviser believes that
its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency exchange
rates occurs, which will increase its gross income. Where exchange rates do not
move in the direction or to the extent anticipated, however, the Fund may
sustain losses which will reduce its gross income. Such transactions, therefore,
could be considered speculative and could involve significant risk of loss.
The Fund has established procedures 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 liquid assets, which will be marked to market on a
daily basis, in an amount equal to the value of its commitments under Forward
Contracts. While these contracts are not presently regulated by the CFTC, the
CFTC may in the future assert authority to regulate Forward Contracts. In such
event, the Fund's ability to utilize Forward Contracts in the manner set forth
above may be restricted.
OPTIONS ON FOREIGN CURRENCIES -- As noted in the Prospectus, the Fund may
purchase and write options on foreign currencies for hedging purposes in a
manner similar to that in which futures contracts on foreign currencies, or
Forward Contracts, will be utilized. For example, a decline in the dollar value
of a foreign currency in which portfolio securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, the Fund may purchase put options on the foreign currency.
If the value of the currency does decline, the Fund will have the right to sell
such currency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forgo a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by the
Fund will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Fund would be required to
purchase or sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
the Fund also may be required to forego all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange rates.
RISK FACTORS IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S PORTFOLIO.
The Fund's abilities effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies depend on the
degree to which price movements in the underlying index or instrument correlate
with price movements in the relevant portion of the Fund's portfolio. In the
case of futures based on an index, the portfolio will not duplicate the
components of the index, and in the case of futures and options on fixed income
securities, the portfolio securities which are being hedged may not be the same
type of obligation underlying such contract. The use of Forward Contracts for
"cross hedging" purposes may involve greater correlation risks. As a result, the
correlation probably will not be exact. Consequently, the Fund bears the risk
that the price of the portfolio securities being hedged will not move in the
same amount or direction as the underlying index or obligation.
For example, if the Fund purchases a Futures Contract put option on an index and
the index decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset by the Futures Contract put
option. It is also possible that there may be a negative correlation between the
index or obligation underlying a Futures Contract in which the Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, the Fund may enter into transactions in Forward Contracts or options
on foreign currencies in order to hedge against exposure arising from the
currencies underlying such forwards. In such instances, the Fund will be subject
to the additional risk of imperfect correlation between changes in the value of
the currencies underlying such forwards or options and changes in the value of
the currencies being hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of speculators
in the options, futures and forward markets. In this regard, trading by
speculators in options, futures and Forward Contracts has in the past
occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on currencies and
Options on Futures Contracts, the Fund is subject to the risk of market
movements between the time that the option is exercised and the time of
performance thereunder. This could increase the extent of any loss suffered by
the Fund in connection with such transactions.
The writing of options on securities or Options on Futures Contracts constitutes
only a partial hedge against fluctuations in the value of the Fund's portfolio.
When the Fund writes an option, it will receive premium income in return for the
holder's purchase of the right to acquire or dispose of the underlying
obligation. In the event that the price of such obligation does not rise
sufficiently above the exercise price of the option, in the case of a call, or
fall below the exercise price, in the case of a put, the option will not be
exercised and the Fund will retain the amount of the premium, less related
transaction costs, which will constitute a partial hedge against any decline
that may have occurred in the Fund's portfolio holdings or any increase in the
cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Fund will incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, the Fund may be
required to forgo the benefits which might otherwise have been obtained from an
increase in the value of portfolio securities or other assets or a decline in
the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the hedging
transactions.
It should also be noted that the Fund may enter into transactions in options
(except for options on foreign currencies), Futures Contracts, Options on
Futures Contracts and Forward Contracts not only for hedging purposes, but also
for non-hedging purposes intended to increase portfolio returns. Non- hedging
transactions in such investments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Fund will only write
covered options, such that liquid assets necessary to satisfy an option exercise
will be segregated at all times, unless the option is covered in such other
manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Nevertheless, the method
of covering an option employed by the Fund may not fully protect it against risk
of loss and, in any event, the Fund could suffer losses on the option position
which might not be offset by corresponding portfolio gains.
The Fund also may enter into transactions in Futures Contracts, Options on
Futures Contracts and Forward Contracts for other than hedging purposes, which
could expose the Fund to significant risk of loss if foreign currency exchange
rates do not move in the direction or to the extent anticipated. In this regard,
the foreign currency may be extremely volatile from time to time, as discussed
in the Prospectus and in this Statement of Additional Information, and the use
of such transactions for non-hedging purposes could therefore involve
significant risk of loss.
With respect to the writing of straddles on securities, the Fund incurs the risk
that the price of the underlying security will not remain stable, that one of
the options written will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing the Fund with two
simultaneous premiums on the same security, but involve additional risk, since
the Fund may have an option exercised against it regardless of whether the price
of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can only be terminated by entering into
a closing purchase or sale transaction. This requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. While the Fund will enter into options or futures positions only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular contracts at any specific time. In
that event, it may not be possible to close out a position held by the Fund, and
the Fund could be required to purchase or sell the instrument underlying an
option, make or receive a cash settlement or meet ongoing variation margin
requirements. Under such circumstances, if the Fund has insufficient cash
available to meet margin requirements, it will be necessary to liquidate
portfolio securities or other assets at a time when it is disadvantageous to do
so. The inability to close out options and futures positions, therefore, could
have an adverse impact on the Fund's ability effectively to hedge its portfolio,
and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities or other
assets held by the Fund or decreases in the prices of securities or other assets
the Fund intends to acquire. Where the Fund enters into such transactions for
other than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolio
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, events could occur in that market which will not be reflected in
the forward, futures or options markets until the following day, thereby making
it more difficult for the Fund to respond to such events in a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options are also
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Fund could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to profit
from open positions or to reduce losses experienced, and could result in greater
losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. The
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on U.S. exchanges, and may be subject to different
margin, exercise, settlement or expiration procedures. As a result, many of the
risks of over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES, OPTIONS AND OPTIONS ON FUTURES CONTRACTS. In
order to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that the
Fund enter into transactions in Futures Contracts, 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.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a Fund, cannot
exceed 15% of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized as such by the
Federal Reserve Bank of New York. Also, the contracts the Fund has in place with
such primary dealers provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula generally is based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any of
the option's intrinsic value (i.e., the amount that the option is in-the-money).
The formula may also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written out-of- the-money. The Fund will treat all or a portion of the formula
as illiquid for purposes of the SEC illiquidity ceiling test imposed by the SEC
staff. The Fund may also write over-the-counter options with non-primary
dealers, including foreign dealers (where applicable), and will treat the assets
used to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed without
the approval of the holders of a majority of the Fund's shares (which, as used
in this SAI, means the lesser of (i) more than 50% of the outstanding shares of
the Trust or a series or class, as applicable, or (ii) 67% or more of the
outstanding shares of the Trust or a series or class, as applicable, present at
a meeting if holders of more than 50% of the outstanding shares of the Trust or
a series or class, as applicable, are represented in person or by proxy). Except
with respect to the Fund's policy on borrowing and investing in illiquid
securities, these investment restrictions and policies are adhered to at the
time of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy.
The Fund may not:
(1) Borrow money or pledge, mortgage or hypothecate its assets, except as a
temporary measure for extraordinary or emergency purposes or for a repurchase
of its shares or except as contemplated by clause (8) below, and in no event
shall the Fund borrow in excess of 1/3 of its assets (the Fund intends to
borrow money only from banks, for the purpose of this restriction, collateral
arrangements with respect to options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies and collateral
arrangements with respect to initial and variation margin are not considered a
pledge of assets).
(2) Purchase any security or evidence of interest therein on margin, except
that the Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and except that the Fund may
make deposits on margin in connection with options, Futures Contracts, Options
on Futures Contracts, Forward Contracts and options on foreign currencies.
(3) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(4) Purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except currencies, currency options or futures, Forward Contracts or Futures
Contracts) in the ordinary course of the business of Fund (the Fund reserves
the freedom of action to hold and to sell real estate acquired as a result of
the ownership of securities).
(5) Purchase securities of any issuer if such purchase at the time thereof
would cause more than 10% of the voting securities of such issuer to be held
by the Fund.
(6) Issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder (for the purpose of this restriction,
collateral arrangements with respect to options, Futures Contracts and Options
on Futures Contracts. Forward Contracts and options on foreign currencies and
collateral arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security).
(7) Make loans to other persons except through the lending of its portfolio
securities not in excess of 30% of its total assets (taken at market value)
and except through the use of repurchase agreements, the purchase of
commercial paper or the purchase of all or a portion of an issue of debt
securities in accordance with its investment objective, policies and
restrictions.
(8) Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short ("short sales against the box"), and
unless not more than 10% of the Fund's net assets (taken at market value) is
held as collateral for such sales at any one time (it is the Fund's present
intention to make such sales only for the purpose of deferring realization of
gain or loss for Federal income tax purposes; such sales would not be made of
securities subject to outstanding options).
(9) Invest 25% or more of its total assets in the securities of any one
issuer (other than U.S. Government securities) or industry.
OTHER OPERATING POLICIES
As a non-fundamental policy, the Fund will not invest in securities which are
subject to legal or contractual restrictions on resale (other than repurchase
agreements), unless the Board of Trustees of the Fund has determined that such
securities are liquid based upon trading markets for the specific security, if,
as a result thereof, more than 15% of such Fund's net assets (taken at market
value) would be so invested.
The Fund will not invest more than 5% of its total assets in companies which,
including their respective predecessors, have a record of less than three years"
continuous operation.
In order to comply with certain state statutes, the Fund will not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio securities if
the percentage of securities so pledged, mortgaged or hypothecated would exceed
33 1/3%.
The Fund may not purchase or retain in its portfolio any securities issued by an
issuer any of whose officers, directors, trustees or security holders is an
officer or Trustee of the Trust, or is a member, partner, officer or Director of
the Adviser, if after the purchase of the securities of such issuer by the Fund
one or more of such persons owns beneficially more than 1/2 of 1% of the shares
or securities, or both, all taken at market value, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value. Also, the Fund will not purchase securities issued by any other
registered investment company or investment trust except by purchase in the open
market where no commission or profit to a sponsor or dealer results from such
purchase other than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a plan of merger or
consolidation; provided, however, that the Fund will not purchase such
securities if such purchase at the time thereof would cause more than 10% of its
total assets (taken at market value) to be invested in the securities of such
issuers; and, provided further, that the Fund will not purchase securities
issued by an open-end investment company. The Fund also may not invest more than
5% of the value of the Fund's net assets, valued at the lower of cost or market,
in warrants. Included within such amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchange. Warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.
These operating policies are not fundamental and may be changed without
shareholder approval.
PORTFOLIO TURNOVER
For the fiscal years ended November 30, 1995, 1996 and 1997, the rates of
portfolio turnover for the Fund were 275%, 288% and 226%, respectively. A higher
turnover rate necessarily involves greater expense to the Fund and could involve
realization of capital gains that would be taxable to the shareholders. The Fund
will engage in portfolio trading if it believes that a transaction, net of costs
(including custodian transaction charges), will help in achieving its investment
objective.
4. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Fund. The Adviser is responsible for the investment management of the
Fund's assets and the officers of the Trust are responsible for its operations.
The Trustees and officers of the Trust are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
TRUSTEES
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.
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 N.T. Butterfield & Son Ltd., Chairman (prior to
November, 1997).
Address: 21 Reid Street, Hamilton, Bermuda.
ABBY M. O'NEILL (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director.
Address: 30 Rockefeller Plaza, Room 5600, New York, New York.
WALTER E. ROBB, III (born 8/18/26)
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
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* (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 manufacturer), Director.
Address: 36080 Shaker Blvd., Hunting Valley, Ohio.
OFFICERS
LESLIE J. NANBERG,* Vice President (born 11/4/45)
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 R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel.
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President.
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).
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).
- ----------
*"Interested persons" (as defined in the Investment Company Act of 1940 (the
"1940 Act") of the Adviser, whose address is 500 Boylston Street, Boston,
Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Messrs. Shames and Scott, Directors of MFD, and Mr.
Cavan, the Secretary of MFD, hold similar positions with certain other MFS
affiliates. Mr. Bailey is a Director of Sun Life Assurance Company of Canada
(U.S.) ("Sun Life of Canada (U.S.)"), the corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses.
The Trust has adopted a retirement plan for non-interested Trustees and Mr.
Bailey. Under this plan, a Trustee will retire upon reaching age 75 and if the
Trustee has completed at least five years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 75 and receive
reduced payments if he has completed at least five years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for Messrs. Scott and Shames.
The Fund will accrue its allocable share of compensation expenses each year to
cover current years service and amortize past service cost.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable under the
retirement plan.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey ..... $3,725 $1,005 10 $242,022
Marshall N. Cohan ..... 4,175 1,845 13 148,067
Dr. Lawrence Cohn . 3,500 730 18 123,917
Sir David Gibbons . 3,725 1,642 13 129,842
Abby M. O'Neill ....... 3,725 837 10 129,842
Walter E. Robb, III . 4,175 1,845 13 148,067
Arnold D. Scott ....... --0-- --0-- N/A --0--
Jeffrey L. Shames . --0-- --0-- N/A --0--
J. Dale Sherratt ...... 5,300 820 20 184,067
Ward Smith ............ 5,300 1,025 13 184,067
(1) For fiscal year ended November 30, 1997.
(2) Based on normal retirement age of 75. See the table below for the estimated annual benefits payable upon
retirement by the Fund to a Trustee based on his or her estimated credited years of service.
(3) Information provided is for calendar year 1997. All Trustees receiving compensation served as Trustees of
42 funds within the MFS fund complex (having aggregate net assets at December 31, 1997, of approximately
$18.9 billion) except Mr. Bailey, who served as Trustee of 69 funds within the MFS fund complex (having
aggregate net assets at December 31, 1997, of approximately $47.9 billion).
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY
FUND UPON RETIREMENT(4)
YEARS OF SERVICE
-----------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
-------------------------------------------------------------------------
$3,150 $473 $ 788 $1,103 $1,575
3,686 553 922 1,290 1,843
4,222 633 1,056 1,478 2,111
4,758 714 1,190 1,665 2,379
5,294 794 1,324 1,853 2,647
5,830 875 1,458 2,041 2,915
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of February 28, 1998, the Trustees and officers, as a group, owned less than
1% of the outstanding shares of the Fund, not including 637,577 shares (which
represent approximately 3.7% of the outstanding shares of the Fund) owned of
record by certain employee benefit plans of MFS of which Messrs. Scott and
Shames are Trustees. As of February 28, 1998, MFS Defined Contribution Plan, c/o
Mark Leary, 500 Boylston Street, Boston, MA 02116-3740 was the record owner of
97.41% of the outstanding Class I shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., which in turn is an indirect wholly owned subsidiary of Sun Life
Assurance Company of Canada.
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement with the Fund dated as of September 1, 1993, as amended (the "Advisory
Agreement"). 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 a management fee, computed and
paid monthly, in an amount equal to the sum of 0.32% of the Fund's average daily
net assets plus 5.65% of its daily gross income for its then-current fiscal year
(i.e., income other than gains from the sale of securities, gains from options
and futures transactions, premium income from options written and gains from
foreign exchange transactions).
For the Fund's fiscal year ended November 30, 1997, MFS received $1,274,191 (of
which $535,730 was based on average daily net assets and $738,461 on gross
income), equivalent on an annualized basis to 0.76% of the Fund's average daily
net assets under its investment advisory agreement. For the Fund's fiscal year
ended November 30, 1996, MFS received $1,615,538 (of which $681,327 was based on
average daily net assets and $934,211 on gross income), equivalent on an
annualized basis to 0.76% of the Fund's average daily net assets under its
investment advisory agreement with the Fund. For the Fund's fiscal year ended
November 30, 1995, MFS received $2,071,032 (of which $860,107 was based on
average daily net assets and $1,210,925 on gross income), equivalent on an
annualized basis to 0.77% of the Fund's average daily net assets under its
investment advisory agreement.
The Fund pays all of the Fund's expenses (other than those assumed by the
Adviser or MFD) including: Trustees fees discussed above; governmental fees;
interest charges; taxes; membership dues in the Investment Company Institute
allocable to the Fund; fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
the Fund; expenses of repurchasing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing share
certificates, periodic reports, notices and proxy statements to shareholders and
to governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the Fund's Custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses are borne by the Fund except that the Fund's Distribution Agreement
with MFD requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific series
are allocated among the series in a manner believed by management of the Trust
to be fair and equitable. Payment by the Fund of brokerage commissions for
brokerage and research services of value to the Adviser in serving its clients
is discussed under the caption "Portfolio Transactions and Brokerage
Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions and, in general, administering its affairs (with the exception of
the services, facilities and personnel provided by the Shareholder Servicing
Agent or the Custodian, see below).
The Advisory Agreement with the Fund will remain in effect until August 1, 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 Restrictions") and, in either case,
by a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days" nor less than 30 days' written notice.
The Advisory Agreement provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the term "MFS" and that
MFS may render services to others and may permit other fund clients to use the
term "MFS" in their names. The Advisory Agreement also provides that neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution and management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the Advisory
Agreement.
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. For the period from March 1, 1997
through November 30, 1997, MFS received fees under the Administrative Services
Agreement of $18,349.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value and public offering price of each class of shares of the Fund. The
Custodian does not determine the investment policies of the Fund or decide which
securities the Fund will buy or sell. The Fund may, however, invest in
securities of the Custodian and may deal with the Custodian as principal in
securities transactions. The Custodian also acts as dividend disbursing agent
for 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 Agent Agreement with the Trust, dated as of September 10,
1986, as amended (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of 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 for the Fund, has contracted with the Shareholder
Servicing Agent to administer and 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
January 1, 1995 (the "Distribution Agreement"). Prior to January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly owned subsidiary of MFS, was
the Fund's distributor. Where this SAI refers to MFD in relation to the receipt
or payment of money with respect to a period or periods prior to January 1,
1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of the Class A shares of the Fund is their
net asset value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under the Right of Accumulation) by any person,
including members of a family unit (e.g., husband, wife and minor children) and
bona fide trustees, and also applies to purchases made under the Right of
Accumulation or a Letter of Intent (see "Investment and Withdrawal Programs" in
this SAI). A group might qualify to obtain quantity sales charge discounts (see
"Investment and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The commission paid
to the underwriter is the difference between the total amount invested and the
sum of (a) the net proceeds to the Fund and (b) the dealer commission. Because
of rounding in the computation of offering price, the portion of the sales
charge paid to the underwriter may vary and the total sales charge may be more
or less than the sales charge calculated using the sales charge expressed as a
percentage of the offering price or as a percentage of the net amount invested
as listed in the Prospectus. In the case of the maximum sales charge the dealer
retains 4% and MFD retains approximately 3/4 of 1% of the public offering price.
In addition, MFD pays a commission to dealers who initiate and are responsible
for purchases of $1 million or more as described in the Prospectus.
During the fiscal year ended November 30, 1997, MFD received sales charges of
$9,052 and dealers received sales charges of $40,619 (as their concession on
gross sales charges of $49,671) for selling Class A shares of the Fund; the Fund
received $4,414,986 representing the aggregate net asset value of such shares.
During the fiscal year ended November 30, 1996, MFD received sales charges of
$3,770 and dealers received sales charges of $35,040 (as their concession on
gross sales charges of $38,810) for selling Class A shares of the Fund. The Fund
received $4,428,702 representing the aggregate net asset value of such shares.
During the fiscal year ended November 30, 1995, MFD received sales charges of
$1,929 and dealers received sales charges of $11,551 (as their concession on
gross sales charges of $13,480) for selling Class A shares of the Fund. The Fund
received $731,149 representing the aggregate net asset value of such shares.
During the fiscal years ended November 30, 1997, 1996 and 1995, the CDSC imposed
on redemption of Class A shares was $9,367, $52 and $1,884, respectively.
CLASS B AND CLASS I SHARES: MFD acts as agent in selling Class B and Class I
shares of the Fund. The public offering price of Class B 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.
During the fiscal years ended November 30, 1997, 1996 and 1995, the CDSC imposed
on redemption of Class B shares was $2,444,072, $468,472 and $874,514,
respectively.
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Funds shares.
The Distribution Agreement will remain in effect until August 1, 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
Trust's shares (as defined in "Investment Restrictions") and in either case, by
a majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities, such as government securities, which are
principally traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Adviser
normally seeks to deal directly with the primary market makers, unless in its
opinion, better prices are available elsewhere. In the case of securities
purchased from underwriters, the cost of such securities generally includes a
fixed underwriting commission or concession. Securities firms or futures
commission merchants may receive brokerage commissions on transactions involving
options, Futures Contracts and Options on Futures Contracts and the purchase and
sale of underlying securities upon exercise of options. The brokerage
commissions associated with buying and selling options may be proportionately
higher than those associated with general securities transactions. From time to
time, soliciting dealer fees are available to the Adviser on the tender of the
Fund's portfolio securities in so-called tender or exchange offers. Such
soliciting dealer fees are in effect recaptured for the Fund by the Adviser. At
present no other recapture arrangements are in effect.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Fund or to its other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $54,160 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation, (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Adviser as a consideration in the selection of brokers to execute portfolio
transactions. However, the Adviser is unable to quantify the amount of
commissions which will be paid as a result of such Research because a
substantial number of transactions will be effected through brokers which
provide Research but which were selected principally because of their execution
capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the Fund's fiscal years ended November 30, 1997, 1996 and 1995, the Fund did
not pay any commissions on total transactions (other than U.S. Government
securities, purchased options transactions and short-term obligations). Most of
the Fund's transactions are principal transactions and thus do not involve the
payment of brokerage commissions.
During the fiscal year ended November 30, 1997, the Fund did not acquire or own
securities issued by regular broker-dealers of the Fund.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or MFS or any subsidiary of MFS. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, it is believed that the Fund's ability to
participate in volume transactions will produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with classes B and C shares of other MFS Funds or MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period in the case of purchases of $1 million or more), the shareholder
may obtain Class A shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by completing the Letter of
Intent section of the Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends not capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable) the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of class A, B and C shares of that shareholder in the MFS Funds or MFS Fixed
Fund reaches a discount level (see "Purchases" in the Prospectus for the sales
charges on quantity purchases). For example, if a shareholder owns shares with a
current offering price value of $75,000 and purchases an additional $25,000 of
Class A shares of the Fund, the sales charge for the $25,000 purchase would be
at the rate of 4% (the rate applicable to single transactions of $100,000). A
shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
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 net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100 except in certain limited circumstances. The
aggregate withdrawals of Class B shares made in any year pursuant to a SWP
generally are limited to 10% of the value of the account at the time of the
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B shares will be made in the following
order: (i) any "Free Amount"; (ii) to the extent necessary, any "Reinvested
Shares"; and (iii) to the extent necessary, "Direct Purchase" subject to the
lowest CDSC (as such terms are defined in "Redemption and Repurchase of Shares
Contingent Deferred Sales Charge" in the Prospectus). The CDSC will be waived in
the case of redemptions of Class B shares pursuant to a SWP but will not be
waived in the case of SWP redemptions of Class A shares which are subject to a
CDSC. To the extent that redemptions for such periodic withdrawals exceed
dividend income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account. All
dividend and capital gain distributions for an account with a SWP will be
received in full and fractional shares of the Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A shares,
maintaining a withdrawal plan concurrently with an investment program would be
disadvantageous because of the sales charges included in share purchases and the
imposition of a CDSC on certain redemptions. The shareholder may deposit into
the account additional shares of the Fund, change the payee or change the amount
of each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be made
at any time either by mailing a check payable to the Fund directly to the
Shareholder Servicing Agent. The shareholder's account number and the name of
his investment dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund or may exchange their shares for the same class of shares
of the other MFS Funds (if available for sale) under the Automatic Exchange
Plan. The Automatic Exchange Plan provides for automatic exchanges of funds from
the shareholder's account in an MFS Fund for investment in the same class of
shares of other MFS Funds selected by the shareholder. Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to six different
funds effective on the seventh day of each month or of every third month,
depending whether monthly or quarterly exchanges are elected by the shareholder.
If the seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchange until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange--Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of the month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of other
MFS Funds (except holders of shares of MFS Money Market Fund, MFS Government
Money Market Fund and holders of Class A shares of MFS Cash Reserve Fund in the
case where such shares are acquired through direct purchase of reinvested
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in the same class of shares of any of the MFS Funds (if
shares of the fund are available for sale) at net asset value (without a sales
charge) and, if applicable, with credit for any CDSC paid. In the case of
proceeds reinvested in MFS Money Market Fund, MFS Government Money Market Fund
and Class A shares of MFS Cash Reserve Fund, the shareholder has the right to
exchange the acquired shares for shares of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment must be
made within 90 days of the redemption and is limited to the amount of the
redemption proceeds. If the shares credited for any CDSC paid are then redeemed
within six years of the initial purchase in the case of Class B shares or 12
months of the initial purchase in the case of certain Class A shares, a CDSC
will be imposed upon redemption. Although redemptions and repurchases of shares
are taxable events, a reinvestment within a certain period of time in the same
fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of any loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account for which payment has been received by the Fund
(i.e., an established account) may be exchanged for shares of the same class of
any of the other MFS Funds (if available for sale and, if the purchaser is
eligible to purchase the class of shares) at net asset value. Exchanges will be
made after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing signed by the
record owner(s) exactly as the shares are registered; if by telephone proper
account identification is given by the dealer or shareholder of record), and
each exchange must involve either shares having an aggregate value of at least
$1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar
401(k) recordkeeping system made available by the Shareholder Servicing Agent)
or all the shares in the account. Each exchange involves the redemption of the
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS Fund. Any
gain or loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If an Exchange Request is received by the
Shareholder Servicing Agent on any business day prior to the close of regular
trading on the Exchange, the Exchange usually will occur on that day if all of
the requirements and restrictions set forth above have been complied with at
that time. However, payment of the redemption proceeds by the Fund, and thus the
purchase of shares of the other MFS Fund, may be delayed for up to seven days if
the Fund determines that such a delay would be in the best interest of all its
shareholders. Investment dealers which have satisfied criteria established by
the Shareholder Servicing Agent may also communicate a shareholder's Exchange
Request to MFD by facsimile subject to the requirements set forth above.
Any state income tax advantages for investment in shares of each state- specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment based on their residency and each state's income tax
laws.
No CDSC is imposed on exchanges, although liability for the CDSC is carried
forward to the exchanged shares. For purposes of calculating the CDSC upon
redemption of shares acquired in an exchange, the purchase of shares acquired in
one or more exchanges is deemed to have occurred at the time of the original
purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except shares of MFS Money Market Fund, MFS Government Money Market
Fund and Class A shares of MFS Cash Reserve Fund acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations , including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund are available for purchase
by all types of tax-deferred retirement plans. MFD makes available, through
investment dealers, plans and/or custody agreements, the following:
Traditional Individual Retirement Accounts (IRAs) (for individuals who desire
to make limited contributions to a tax-deferred retirement program and, if
eligible, to receive a federal income tax deduction for amounts contributed);
Roth Individual Retirement Accounts (Roth IRAs) (for individuals who desire to
make limited contributions to a tax-favored retirement program);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. Because the Fund expects to earn primarily
interest income, it is expected that no Fund dividends will qualify for the
dividends received deduction for corporations. Distributions of net capital
gains (i.e., the excess of the 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 federal income tax
purposes, without regard to the length of time the shareholders have held their
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 federal
tax status of its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as 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 18 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 ninety days after their purchase
followed by any purchase (including purchases by exchange or by reinvestment)
without payment of an additional sales charge of Class A shares of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, 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. Use of foreign currencies for non-
hedging purposes may be limited in order to avoid a tax on the Fund. Investment
income received by the Fund from foreign securities may be subject to foreign
income taxes withheld at the source; the Fund does not expect to be able to pass
through to shareholders foreign tax credits with respect to such foreign taxes.
The United States has entered into tax treaties with many foreign countries that
may entitle the Fund to a reduced rate of tax or an exemption from tax on such
income; the Fund intends to qualify for treaty reduced rates where available. It
is not possible, however, to determine the Fund's effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested within various
countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
made 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.
8. DETERMINATION OF NET ASSET VALUE; PERFORMANCE INFORMATION
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. (As of the date of this SAI, the
Exchange is open for trading every weekday except for the following holidays (or
the days on which they are observed): New Year's Day, 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 during each
such day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Forward Contracts using a pricing model taking into
consideration market data from an external pricing source. Use of the pricing
services has been approved by the Board of Trustees. All other securities,
futures contracts and options in the Fund's portfolio (other than short-term
obligations) for which the principal market is one or more securities or
commodities exchanges (whether domestic or foreign) will be valued at the last
reported sale price or at the settlement price prior to the determination (or if
there has been no current sale, at the closing bid price) on the primary
exchange on which such securities, futures contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the Nasdaq system, in
which case they are valued at the last sale price or, if no sales occurred
during the day, at the last quoted bid price. Debt securities (other than
short-term obligations but including listed issues) in the Fund's portfolio are
valued on the basis of valuations furnished by a pricing service which utilizes
both dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-sized trading in
similar groups of securities, yields, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive reliance
upon quoted prices or exchange or over-the-counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities.
Short-term obligations, if any, in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short- term securities with a remaining maturity in excess of 60 days will be
valued based upon dealer supplied valuations. Portfolio securities and
over-the-counter options and Forward Contracts, for which there are no
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Board of Trustees. A share's net asset value is
effective for orders received by the dealer prior to its calculation and
received by MFD, in its capacity as the Fund's distributor, or its agent, the
Shareholder Servicing Agent, prior to the close of the business day.
PERFORMANCE INFORMATION
TOTAL RETURN: The Fund will calculate its total rate of return for each class of
shares for certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000 (made with
all distributions reinvested and reflecting the CDSC or the maximum public
offering price) to reach the value of that investment at the end of the periods.
The Fund may also calculate (i) a total rate of return, which is not reduced by
the CDSC (5% maximum for Class B shares purchased on and after January 1, 1993,
but before September 1, 1993 and 4% maximum for Class B shares) and therefore
may result in a higher rate of return, (ii) a total rate of return assuming an
initial account value of $1,000, which will result in a higher rate of return
since the value of the initial account will not be reduced by the sales charge
applicable to Class A shares (4.75% maximum) and/ or (iii) total rates of return
which represent aggregate performance over a period or year-by-year performance
and which may or may not reflect the effect of the maximum sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered for sale
to, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest 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).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS -- The performance results presented in Appendix A attached
hereto under the heading "Performance Results", assume an initial investment of
$10,000 in Class B shares, and cover the period from August 1, 1988 through
December 31, 1997. It has been assumed that dividend and capital gain
distributions were reinvested in additional shares. Any performance results or
total rate of return quotation provided by the Fund should not be considered as
representative of the performance of the Fund in the future since the net asset
value of shares of the Fund will vary based not only on the type, quality and
maturities of the securities held in the Fund's portfolio, but also on changes
in the current value of such securities and on changes in the expenses of the
Fund. These factors and possible differences in the methods used to calculate
total rates of return should be considered when comparing the total rate of
return of the Fund to total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects the
performance of both principal and income. Current net asset value and account
balance information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class of the Fund over a
30-day period. The yield is calculated by dividing the net investment income per
share allocated to a particular class of the Fund earned during the period by
the maximum public offering price per share of such class on the last day of
that period. The resulting figure is then annualized. Net investment income per
share of a class is determined by dividing (i) the dividends and interest earned
by the Fund allocated to that class during the period, minus accrued expenses of
such class for the period, by (ii) the average number of Fund shares of such
class entitled to receive dividends during the period multiplied by the maximum
public offering price per share of such class on the last day of the period. The
Fund's yield calculations for Class A shares assume a maximum sales charge of
4.75%. For Class B shares, the Fund's yield calculations assume no CDSC is paid.
Current yield quotations for each class of shares are presented in Appendix A
attached hereto under the heading entitled "Performance Quotations".
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past twelve months by the maximum public offering price of that class at the end
of such period. Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past twelve months. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income for option writing,
short-term capital gains and return of invested capital, and is calculated over
a different period of time. The Fund's current distribution rate calculation for
Class A shares assumes a maximum sales charge of 4.75%. The Fund's current
distribution rate calculation for Class B shares assumes no CDSC is paid.
Current distribution rate quotations for each class of shares are presented in
Appendix A attached hereto under the heading "Performance Quotations".
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 Saloman Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street, Standard
and Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy by Gordon
K. Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may 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 the following: 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.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to
register under the Securities Act of 1933. ("Truth in Securities Act" or
"Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first-closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market-
value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard(R) Equity Fund,
the first fund to invest solely in companies deemed to be union- friendly
by an advisory board of senior labor officials, senior managers of
companies with significant labor contracts, academics and other national
labor leaders or experts.
9. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A and Class B shares
(the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule
12b-1 thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each respective
class of shareholders. The provisions of the Distribution Plan are severable
with respect to each class of shares offered by the Fund. The Distribution Plan
is designed to promote sales, thereby increasing the net assets of the Fund.
Such an increase may reduce the 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.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended November 30, 1997, the Fund paid the following
Distribution Plan expenses:
AMOUNT OF AMOUNT OF
DISTRIBUTION AMOUNT OF DISTRIBUTION
AND SERVICE SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
Class A Shares $ 0 $ 0 $ 0
Class B Shares $1,417,862 $1,117,033 $300,829
GENERAL: The Distribution Plan 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 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
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") 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.
10. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES The Trust's Declaration
of Trust permits the Trustees of the Fund to issue an unlimited number of full
and fractional Shares of Beneficial Interest (without par value) of one or more
separate series and to divide or combine the shares of any series into a greater
or lesser number of shares without thereby changing the proportionate beneficial
interests in that series. The Trustees have currently authorized shares of the
Fund and two other series. The Declaration of Trust further authorizes the
Trustees to classify or reclassify any series of shares into one or more
classes. Pursuant thereto, the Trustees of the Trust have authorized the
issuance of two classes of shares of each of the Trust's three series, Class A
shares and Class B shares as well as Class I shares for the Fund and two other
series and Class C shares for one of the series. Each share of a class of the
Fund represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of each
class are entitled to share pro rata in the net assets of the Fund allocable to
such class available for distribution to shareholders. The Trust reserves the
right to create and issue additional series or classes of shares, in which case
the shares of each class would participate equally in the earnings, dividends
and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights (except as described in "Purchases -- Conversion of Class B Shares" in
the Prospectus). Shares are fully paid and non-assessable. The Trust may enter
into a merger or consolidation, or sell all or substantially all of its assets
(or all or substantially all of the assets belonging to any series of the
Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated, the Trust will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
11. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, assistance with tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC.
The Portfolio of Investments at November 30, 1997, the Statement of Assets and
Liabilities at November 30, 1997, the Statement of Operations for the year ended
November 30, 1997, the Statement of Changes in Net Assets for each of the years
in the two-year period ended November 30, 1997, the Notes to Financial
Statements and the Independent Auditors' Report, each of which is included in
the Annual Report to shareholders of the Fund, are incorporated by reference
into this SAI and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent auditors, as experts in accounting and
auditing. A copy of the Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below 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. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
<CAPTION>
PERFORMANCE RESULTS -- CLASS B SHARES
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- --------------- ------------- ---------- ------
<S> <C> <C> <C> <C>
December 31, 1988* $10,116 $0 $ 309 $10,425
December 31, 1989 9,999 0 1,209 11,208
December 31, 1990 9,767 0 2,235 12,002
December 31, 1991 9,989 0 3,432 13,421
December 31, 1992 9,387 0 4,352 13,739
December 31, 1993 9,524 0 5,478 15,002
December 31, 1994 8,384 0 5,654 14,038
December 31, 1995 9,123 0 7,037 16,160
December 31, 1996 8,965 0 7,811 16,776
December 31, 1997 8,901 0 8,699 17,601
- ----------
*For the period from the start of business, August 1, 1988 to December 31, 1988.
Explanatory Notes: The results in the table assume that income dividends and capital gain distributions were invested in
additional shares. No adjustment has been made for income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of November 30, 1997.
<CAPTION>
ACTUAL
30-DAY 30-DAY
AVERAGE ANNUAL TOTAL RETURNS YIELD YIELD
---------------------------- (INCLUDING (WITHOUT CURRENT
LIFE OF ANY ANY DISTRIBUTION
1 YEAR 5 YEAR FUND WAIVERS) WAIVERS) RATE
------ ------ ------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Class A Shares with sales charge ........... -0.40% 4.99%(1) 6.10%(1) N/A 4.10% 6.24%
Class A Shares without sales charge ........ 4.59% 6.02%(1) 6.66%(1) N/A N/A N/A
Class B Shares with CDSC ................... -0.35% 4.77% 6.15%(2) N/A N/A N/A
Class B Shares without CDSC ................ 3.57% 5.08% 6.15%(2) N/A 3.31% 5.48%
Class I Shares ............................. 4.06%(3) 5.18%(3) 6.21%(3) N/A 4.29% 6.38%(4)
(1) Class A share performance includes the performance of the Fund's Class B shares for periods prior to the inception of
Class A shares on September 7, 1993. Sales charges, expenses and expense ratios, and therefore performance, for Class A
and Class B shares differ. Class A share performance has been adjusted to reflect that Class A shares generally are
subject to an initial sales charge (unless the performance quotation does not give effect to the initial sales charge)
whereas Class B shares generally are subject to a CDSC. Class A share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which generally are higher for Class B shares.
(2) From the initial public offering date of Class B shares on August 1, 1988.
(3) Class I share performance includes the performance of the Fund's Class B shares for the periods prior to the inception of
Class I shares on January 2, 1997. Sales charges, expenses and expense ratios, and therefore performance for Class I and
B shares differ. Class I share performance has been adjusted to reflect that Class I shares are not subject to a CDSC,
whereas Class B shares generally are subject to a CDSC. Class I share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class I shares.
(4) The current distribution rate for Class I shares is calculated by annualizing the last dividend.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company 225
Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R) INTERMEDIATE
INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[GRAPHIC OMITTED]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MII-13-4/98/.5M 05/205
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
For the period from January 1, 1988 for MFS
Emerging Growth Fund ("MEG") and MFS Large Cap
Growth Fund ("MCG") and August 1, 1988 for MFS
Intermediate Income Fund ("MII") to November 30,
1997:
Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At November 30, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
For each of the two years in the period ended
November 30, 1997:
Statement of Changes in Net Assets*
For the year ended November 30, 1997:
Statement of Operations*
- ----------------
* Incorporated herein by reference to each Fund's Annual Report to
Shareholders, dated November 30, 1997 for MEG, filed with the SEC via EDGAR
on February 9, 1998 and February 6, 1998 for MII and MCG.
(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)
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)
(c) Investment Advisory Agreement for MFS
Intermediate Income Fund, dated September 1,
1993. (3)
6 (a) Distribution Agreement between the Trust
and MFS Fund Distributors, Inc., dated
January 1, 1995. (3)
(b) Dealer Agreement between MFS Fund
Distributors, Inc. ("MFD"), and a dealer 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; filed herewith.
(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)
(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; filed
herewith.
12 Not Applicable.
13 Investment Representation Letter. (6)
14 (a) Forms for Individual Retirement Account
Disclosure Statement as currently in effect.
(5)
(b) Forms for MFS 403(b) Custodial Account
Agreement as currently in effect. (5)
(c) Forms for MFS Prototype Paired Defined
Contribution Plans as Trust Agreement as
currently in effect. (5)
(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 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)
17 Financial Data Schedules for each class of
each Series of the Trust; filed herewith.
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;
filed herewith.
- ----------
(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.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
FOR MFS EMERGING GROWTH FUND
<CAPTION>
<S> <C>
(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)
</TABLE>
<TABLE>
FOR MFS LARGE CAP GROWTH FUND (FORMERLY KNOWN AS MFS CAPITAL GROWTH FUND)
<CAPTION>
<S> <C>
(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)
</TABLE>
<TABLE>
FOR MFS INTERMEDIATE INCOME FUND
<CAPTION>
<S> <C> <C>
(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)
</TABLE>
ITEM 27. INDEMNIFICATION
The Trustees and officers of the Trust and the personnel of
the Trust's investment adviser and principal underwriter are insured under an
errors and omissions liability insurance policy. The Trust and its officers are
also insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940, as amended.
Reference is hereby made to (a) Article V of the Trust's
Declaration of Trust, incorporated by reference to Post-Effective Amendment No.
16, filed with the SEC on March 30, 1995 and (b) Section 8 of the Shareholder
Servicing Agent Agreement, incorporated by reference to Registrant's
Post-Effective Amendment No. 17 filed with the SEC via EDGAR on October 13,
1995.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds (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 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). 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.
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. 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.
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 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.
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 various
subsidiaries and affiliates of Sun
Life)
Joseph W. Dello Russo Director of Mutual Fund Operations,
The Boston Company, Exchange Place,
Boston, Massachusetts (until August,
1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in
whole or in part, at the office of the Registrant and the following locations:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(principal underwriter) Boston, MA 02116
State Street Bank and State Street South
Trust Company (custodian) 5 - West
North Quincy, MA 02171
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to shareholders
upon request and without charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being Registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 27th day of March, 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 March 27, 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
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.
<PAGE>
POWER OF ATTORNEY
MFS Series Trust II
The undersigned officer of MFS Series Trust II (the "Registrant") hereby
severally constitutes and appoints Jeffrey L. Shames, Arnold D. Scott, W. Thomas
London, and James R. Bordewick, Jr., and each of them singly, as true and lawful
attorneys, with full power to them and each of them to sign for the undersigned,
in the name of, and in the capacity indicated below, any Registration Statement
and any and all amendments thereto and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission for the purpose of registering the Registrant as a
management investment company under the Investment Company Act of 1940 and/or
the shares issued by the Registrant under the Securities Act of 1933 granting
unto my said attorneys, and each of them, acting alone, full power and authority
to do and perform each and every act and thing requisite or necessary or
desirable to be done in the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys or any of them may lawfully do or cause to be done by virtue
thereof.
In WITNESS WHEREOF, the undersigned has hereunto set his hand on this 19th
day of February, 1998.
Signature Title
--------- -----
STEPHEN E. CAVAN Principal Executive Officer
- ---------------------------------
Stephen E. Cavan
<PAGE>
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C>
9 (b) Amendment to Shareholder Servicing Agent
Agreement, dated January 1, 1998, to amend fee
schedule.
11 Consent of Deloitte & Touche LLP with respect to
financial statements for fiscal year ended
November 30, 1997.
17 Financial Data Schedules for each class of each
Series of the Trust.
Power of Attorney, dated February 19, 1998.
</TABLE>
<PAGE>
EXHIBIT NO. 99.9(b)
MFS SERIES TRUST II
500 Boylston Street o Boston o Massachusetts 02116
As of January 1, 1998
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated September 10, 1986, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS SERIES TRUST II
By: W. THOMAS LONDON
-----------------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
------------------------------
Joseph W. Dello Russo
Treasurer
<PAGE>
ATTACHMENT 1
As of January 1, 1998
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST II (THE "FUND")
The fees to be paid by the Fund on behalf of its series with respect to all
shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be 0.1125% of the average daily net assets of the Fund.
<PAGE>
EXHIBIT NO. 99.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 25 to Registration Statement No. 33-7637 of MFS Series Trust II of
our reports, each dated January 9, 1998, appearing in the annual reports to
shareholders for the year ended November 30, 1997, of MFS Emerging Growth Fund,
MFS Intermediate Income Fund, and MFS Large Cap Growth Fund, each a series of
MFS Series Trust II, and to the references to us under the headings "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information, both of which are part
of such Registration Statement.
DELOITTE & TOUCHE LLP
--------------------------
Deloitte & Touche LLP
Boston, Massachusetts
March 24, 1998
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<NAME> MFS SERIES TRUST II
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<NAME> MFS SERIES TRUST II
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<NAME> MFS SERIES TRUST II
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<NAME> MFS SERIES TRUST II
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<TABLE> <S> <C>
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<CIK> 0000798250
<NAME> MFS SERIES TRUST II
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<NAME> MFS INTERMEDIATE INCOME FUND - CLASS A
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