<PAGE> 1
<TABLE>
PROSPECTUS
March 1, 1995
MFS(R) WORLD Class A Shares of Beneficial Interest
GROWTH FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- -------------------------------------------------------------------------------------------------
<CAPTION>
PAGE
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<S> <C>
1. Expense Summary......................................................................... 2
2. The Fund................................................................................ 3
3. Condensed Financial Information......................................................... 4
4. Investment Objective and Policies....................................................... 5
5. Risk Factors............................................................................ 9
6. Management of the Fund.................................................................. 12
7. Information Concerning Shares of the Fund............................................... 14
Purchases........................................................................... 14
Exchanges........................................................................... 19
Redemptions and Repurchases......................................................... 20
Distribution Plans.................................................................. 22
Distributions....................................................................... 24
Tax Status.......................................................................... 24
Net Asset Value..................................................................... 24
Description of Shares, Voting Rights and Liabilities................................ 25
Performance Information............................................................. 25
8. Shareholder Services.................................................................... 25
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS WORLD GROWTH FUND, 500 Boylston St., Boston, MA 02116 (617) 954-5000
The investment objective of MFS World Growth Fund (the "Fund") is to seek
capital appreciation by investing in securities of companies worldwide growing
at rates expected to be well above the growth rate of the overall U.S. economy.
No assurance can be given that the Fund's investment objective will be achieved.
The Fund is a non-diversified series of MFS Series Trust VIII (the "Trust"), an
open-end management investment company. The minimum initial investment generally
is $1,000 per account (see "Purchases").
THE FUND IS INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT THE
RISKS ENTAILED IN SEEKING CAPITAL APPRECIATION AND IN INVESTING IN FOREIGN
SECURITIES.
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. The Fund also has two sub-advisers, Batterymarch Financial
Management, Inc., located at 200 Clarendon Street, Boston, Massachusetts 02116
and Oechsle International Advisers, L.P. (each a "sub-adviser"), located at One
International Place, Boston, Massachusetts 02110.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission a
Statement of Additional Information, dated March 1, 1995, which contains more
detailed information about the Trust and the Fund and is incorporated into this
Prospectus by reference. See page 27 for a further description of the
information set forth in the Statement of Additional Information. A copy of the
Statement of Additional Information may be obtained without charge by contacting
the Shareholder Servicing Agent (see back cover for address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 2
<TABLE>
1. EXPENSE SUMMARY
<CAPTION>
CLASS CLASS
SHAREHOLDER TRANSACTION EXPENSES: CLASS A B C
------- ------ ------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price)....... 5.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption See
proceeds, as applicable).............................. Below(1) 4.00% 0.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY
NET ASSETS):
Management Fees......................................... 0.90% 0.90% 0.90%
Rule 12b-1 Fees (after any fee reduction)............... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses.......................................... 0.43% 0.50% 0.43%(4)
------ ---- ----
Total Operating Expenses (after any fee reduction)...... 1.58%(5) 2.40% 2.33%
<FN>
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(1) Purchases of $1 million or more are not subject to an initial sales charge; however, a contingent
deferred sales charge ("CDSC") of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases (see "Purchases").
(2) The Fund has adopted a Distribution Plan for its Class A shares in accordance with Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of) 0.35% per annum of the
average daily net assets attributable to the Class A shares (see "Distribution Plans"). MFD is
currently waiving the 0.10% distribution fee. This waiver may be rescinded at any time without
notice to shareholders. After a substantial period of time, distribution expenses paid under this
Plan, together with the initial sales charge, may total more than the maximum sales charge that
would have been permissible if imposed entirely as an initial sales charge.
(3) The Fund has adopted separate Distribution Plans for Class B and Class C shares in accordance with
Rule 12b-1 under the 1940 Act, which provide that it will pay distribution/service fees aggregating
up to (but not necessarily all of) 1.00% per annum of the average daily net assets attributable to
Class B shares under the Class B Distribution Plan and Class C shares under the Class C Distribution
Plan (see "Distribution Plans" below). After a substantial period of time, distribution expenses paid
under these Plans, together with any CDSC payable upon redemption of Class B shares, may total more
than the maximum sales charge that would have been permissible if imposed entirely as an initial sales
charge.
(4) Except for the shareholder servicing agent fee component, "Other Expenses" for Class C shares is based
on Class A expenses incurred during the fiscal year ended October 31, 1994. The shareholder servicing
agent fee component of "Other Expenses" is a predetermined percentage based upon the Fund's net assets
attributable to each class.
(5) Absent any reductions, "Total Operating Expenses", expressed as a percentage of average daily net assets,
would have been 1.68% for Class A shares.
</TABLE>
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<TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000 investment in the Fund,
assuming (a) 5% annual return and, unless otherwise noted, (b) redemption at the end of each of the
time periods indicated:
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
------ ------- ----------------- -------
<S> <C> <C> <C> <C>
(1) (2)
1 year........................................ $ 73 $ 64 $24 $24
3 years....................................... 105 105 75 73
<FN>
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(1) Assumes redemption.
(2) Assumes no redemption.
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases";
(iii) management fees -- "Investment Adviser" and "Sub-Investment Advisers"; and
(iv) Rule 12b-1 (i.e., distribution plan) fees -- "Distribution Plans."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on July 31, 1987. The Trust presently consists of
two series, each of which represents a portfolio with separate investment
policies. Shares of the Fund are sold continuously to the public and the Fund
then uses the proceeds to buy securities for its portfolio. Three classes of
shares of the Fund currently are offered to the general public. Class A shares
are offered at net asset value plus an initial sales charge (or a CDSC in the
case of certain purchases of $1 million or more) and subject to a Distribution
Plan providing for an annual distribution fee and a service fee. Class B shares
are offered at net asset value without an initial sales charge but subject to a
CDSC and Distribution Plan providing for an annual distribution fee and service
fee which are greater than the Class A distribution fee and service fee; Class B
shares will convert to Class A shares approximately eight years after purchase.
Class C shares are offered at net asset value without an initial sales charge or
a CDSC but subject to a Distribution Plan providing for an annual distribution
fee and service fee which are equal to the Class B annual distribution fee and
service fee. Class C shares do not convert to any other class of shares of the
Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets
(including supervision of the Sub-Advisers) and the officers of the Trust are
responsible for its 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 or either Sub-Adviser. The
Trust also offers to buy back (redeem) shares of the Fund from shareholders at
any time at net asset value, less any applicable CDSC.
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<PAGE> 4
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to Shareholders which are
incorporated by reference into the Fund's Statement of Additional Information in
reliance upon the report of Deloitte & Touche LLP, independent certified public
accountants, for the period from the commencement of investment operations,
November 18, 1993 to October 31, 1994.
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
YEAR ENDED OCTOBER 31, 1994+++ CLASS A CLASS B CLASS C+
------------------------------ -------- -------- --------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value -- Beginning of period.................. $ 15.00 $ 15.00 $ 16.04
Income from investment operations:
Net investment loss#sec............................... $ (0.02) $ (0.15) $ (0.13)
Net realized and unrealized gain on investments....... 2.47 2.47 1.43
-------- -------- -------
Total from investment operations................... $ 2.45 $ 2.32 $ 1.30
-------- -------- -------
Net asset value -- End of period........................ $ 17.45 $ 17.32 $ 17.34
-------- -------- -------
Total return++.......................................... 16.33%** 15.47%** 8.10%**
Ratios (to average net assets)/Supplemental Datasec.:
Expenses*............................................. 1.57% 2.39% 2.31%
Net investment loss*.................................. (0.14)% (0.95)% (0.83)%
Portfolio turnover...................................... 100% 100% 100%
Net assets at end of period (000 omitted)............. $131,503 $236,971 $11,872
<FN>
- ---------------
+++ For the period from the commencement of investment operations, November 18, 1993 to October 31, 1994.
* Annualized.
** Not annualized.
+ For the period from the commencement of offering of Class C shares, January 3, 1994 to October 31, 1994.
++ Total return for Class A shares does not include the applicable sales charge. If the sales charge had been
included, the result would have been lower.
# Net investment loss per share is based on average shares outstanding. sec. MFD did not impose a portion
of its distribution fee on Class A shares amounting to $0.016 per share for the period. If this fee had been
incurred by the Fund, the ratio of expenses to average net assets and net investment income to average net
assets (on an annualized basis) would have been 1.67% and (0.24)%, respectively.
</TABLE>
4
<PAGE> 5
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to seek capital
appreciation by investing in securities of companies worldwide growing at rates
expected to be well above the growth rate of the overall U.S. economy. Any
investment involves risk and there can be no assurance that the Fund will
achieve its investment objective. See "Risk Factors" below.
INVESTMENT POLICIES -- The Fund seeks to achieve its objective by investing
primarily in securities in three market sectors: U.S. emerging growth companies;
foreign growth companies; and emerging market companies. (The U.S. emerging
growth and foreign growth sectors may include securities of more established
companies which represent opportunities for long-term growth.) Although the
percentage of the Fund's assets invested in securities issued abroad and
denominated or quoted in foreign currencies ("non-dollar securities") will vary
depending on the state of the economies of the various countries of the world,
their financial markets and the relationship of their currencies to the U.S.
dollar, under normal conditions, the Fund will be invested in at least three
different countries, one of which will be the United States. For defensive
reasons or during times of international political or economic uncertainty or
turmoil, most or all of the Fund's investments may be in the United States.
While the Fund intends to invest primarily in equity securities, the Fund may
also invest in fixed income securities as described below. Equity securities
include: common and preferred stocks; securities such as bonds, warrants or
rights that are convertible into stock; and depositary receipts for those
securities. The selection of securities is made solely on the basis of potential
for capital appreciation. Dividend and interest income from portfolio
securities, if any, is incidental to the Fund's investment objective of capital
appreciation.
U.S. EMERGING GROWTH COMPANIES
The Fund may invest in securities of small and medium-sized U.S. companies that
are early in their life cycle but which have the potential to become major
enterprises (emerging growth companies). Such companies generally have annual
gross revenues ranging from $10 million to $2 billion, would be expected to show
earnings growth over time that is well above the growth rate of the overall
economy and the rate of inflation, and would have the products, management, and
market opportunities which are usually necessary to become more widely
recognized as growth companies. The Fund may also invest in more established
companies whose rates of earnings growth are expected to accelerate because of
special factors, such as rejuvenated management, new products, changes in
consumer demand, or basic changes in the economic environment or which otherwise
represent opportunities for long-term growth. The Fund may also invest to a
limited extent in restricted securities of companies which the Adviser believes
have significant growth potential. These securities may be considered
speculative and may not be readily marketable.
FOREIGN GROWTH COMPANIES
The Fund may invest in securities (including American Depositary Receipts
("ADRs")) of foreign growth companies and more established foreign 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 or which otherwise
represent opportunities for long-term growth. See "Risk Factors" below.
It is anticipated that these companies will primarily be in nations with more
developed securities markets such as Australia, Canada, Japan, New Zealand and
Western European countries.
EMERGING MARKET SECURITIES
The Fund may invest, as described below, in countries or regions with relatively
low gross national product per capita compared to the world's major economies,
and in countries or regions with the potential for rapid economic growth
(emerging markets). Emerging markets will include any country: (i) having an
"emerging stock market" as defined by the International Finance Corporation;
(ii) with low- to middle-income economies according to the International Bank
for Reconstruction and Development (the World Bank); (iii) listed in World Bank
publications as developing; or (iv) determined by the Adviser or a Sub-Adviser
to be an emerging market as defined above. The Fund may invest in securities of:
(i) companies the principal securities trading market for which is an emerging
market country; (ii) companies organized under the laws of, and with a principal
office in, an emerging
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market country; (iii) companies whose principal activities are located in
emerging market countries; or (iv) companies traded in any market that derive
50% or more of their total revenue from either goods or services produced in an
emerging market or sold in an emerging market.
FIXED INCOME SECURITIES: Debt securities of both domestic and foreign issuers
in which the Fund may invest include all types of long- or short-term debt
obligations, such as bonds, debentures, notes, equipment lease certificates,
equipment trust certificates, conditional sales contracts and commercial paper.
Fixed income securities in which the Fund may invest include securities in the
lower rating categories of recognized rating agencies (and comparable unrated
securities) (see "Risk Factors" below). The Fund will not invest more than 35%
of its assets in fixed income securities rated Ba or lower by Moody's Investors
Service, Inc. ("Moody's") or BB or lower by Standard & Poor's Ratings Group
("S&P") or by Fitch Investors Service, Inc. ("Fitch") (or comparable unrated
securities).
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the Statement of Additional
Information for further information on these securities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities in which the Fund may invest also include zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind ("PIK bonds").
Zero coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors than debt obligations which make regular
payments of interest. The Fund will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities under disadvantageous circumstances to
satisfy the Fund's distribution obligations.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Fund may invest in other
investment companies to the extent permitted by the 1940 Act (i) as a means by
which the Fund may invest in securities of certain countries which do not
otherwise permit investment, (ii) as a means to purchase securities of emerging
market companies having limited free-float, or (iii) when the Adviser or a
Sub-Adviser believes such investments may be more advantageous to the Fund than
a direct market purchase of securities.
OTHER INVESTMENTS: When the Adviser or a Sub-Adviser believes that investing
for defensive purposes is appropriate, such as during periods of unusual market
conditions, or when relative yields are deemed attractive, part or all of the
Fund's assets may be temporarily invested in cash (including foreign currency)
or cash equivalent short-term obligations including, but not limited to,
certificates of deposit, commercial paper, short-term notes, obligations issued
or guaranteed by the U.S. Government or any of its agencies or instrumentalities
and repurchase agreements.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time
6
<PAGE> 7
the value of the securities could decline). As discussed in the Statement of
Additional Information, the Fund has adopted certain procedures intended to
minimize any such risk.
RESTRICTED SECURITIES: The Fund may purchase securities that are not registered
under the Securities Act of 1933, ("restricted securities"), including those
that can be offered and sold to "qualified institutional buyers" under Rule 144A
under the 1933 Act ("Rule 144A securities"). The Trust's Board of Trustees
determines, based upon a continuing review of the trading markets for a specific
Rule 144A security, whether such security is illiquid and thus subject to the
Fund's limitations on investing not more than 15% of its net assets is illiquid
investments, or liquid and thus not subject to limitation. The Board of Trustees
has adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board,
however, will retain sufficient oversight and is ultimately responsible for the
determinations. The Board will carefully monitor the Fund's investments in Rule
144A securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing Rule
144A securities held in the Fund's portfolio. Subject to the Fund's 15%
limitation on investments in illiquid investments, the Fund may also invest in
restricted securities that may not be sold under Rule 144A, which presents
certain risks. As a result, the Fund might not be able to sell these securities
when the Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of unrestricted securities.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options
on securities ("Options") and purchase put and call Options on securities that
are traded on United States and foreign securities exchanges and over the
counter. The Fund will write such Options for the purpose of increasing its
current income and/or to protect the value of its portfolio. The Fund may also
write combinations of put and call Options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk. The Fund may purchase put or call Options in
anticipation of declines in the value of portfolio securities or increases in
the value of securities to be acquired.
The Fund may purchase and sell options that are traded on U.S. and foreign
exchanges, and Options traded over-the-counter with broker-dealers who deal in
these Options. The ability to terminate over-the-counter Options is more limited
than with exchange-traded Options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The Fund
will treat assets used to cover over-the-counter Options as illiquid unless the
dealer is a primary dealer in U.S. Government securities and has given the Fund
the unconditional right to close such Options at a formula price, in which event
only an amount of the cover determined with reference to the formula will be
considered illiquid. The Fund may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
Options and purchase call and put Options on domestic and foreign stock indices
("Options on Stock Indices"). The Fund may write such option for the purpose of
increasing its current income and/or to protect its portfolio against declines
in the value of securities it owns or increases in the value of securities to be
acquired. When the Fund writes an option on a stock index, and the value of the
index moves adversely to the holder's position, the option will not be
exercised, and the Fund will either close out the option at a profit or allow it
to expire unexercised. The Fund will thereby retain the amount of the premium,
less related transaction costs, which will increase its gross income and offset
part of the reduced value of portfolio securities or the increased cost of
securities to be acquired. Such transactions, however, will constitute only
partial hedges against adverse price fluctuations, since any such fluctuations
will be offset only to the extent of the premium received by the Fund for the
writing of the option, less related transaction costs. In addition, if the value
of an underlying index moves adversely to the Fund's option position, the option
may be exercised, and the Fund will experience a loss which may only be
partially offset by the amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
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<PAGE> 8
FUTURES CONTRACTS: The Fund may enter into stock index futures contracts
("Futures Contracts"). Purchases or sales of Futures Contracts 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.
Futures Contracts may also be entered into for non-hedging purposes, to the
extent permitted by applicable law, which involves greater risks and could
result in losses which are not offset by gains on other portfolio assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write Options on Futures
Contracts ("Options on Futures Contracts") 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 Fund's portfolio 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, although it may be necessary to
exercise the option to realize any profit, which results in the establishment of
a futures position. The writing of Options on Futures Contracts, 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. Options
on Futures Contracts may also be entered into for non-hedging purposes, to the
extent permitted under applicable law, which involves greater risks and could
result in losses which are not offset by gains on other portfolio assets.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the dollar cost of foreign securities to be acquired.
As in the case of other types of Options, however, the writing of an Option on
Foreign Currency will constitute only a partial hedge, up to the amount of the
premium received, and the Fund may be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an Option on Foreign Currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
paid for the Option plus related transaction costs. Options on Foreign
Currencies to be written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into forward
foreign currency exchange contracts ("Forward Contracts") for the purchase or
sale of a fixed quantity of a foreign currency at a future date at a price set
at the time of the contract. The Fund will enter into Forward Contracts for
hedging purposes as well as for the non-hedging purpose of increasing the Fund's
current income. By entering into transactions in Forward Contracts, however, the
Fund may be required to forego the benefits of advantageous changes in exchange
rates and, in the case of Forward Contracts entered into for non-hedging
purposes, the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative. Forward Contracts are
traded over-the-counter, and not on organized commodities or securities
exchanges. As a result, such contracts operate in a manner distinct from
exchange-traded instruments, and their use involves certain risks beyond those
associated with transactions in Futures Contracts or options traded on
exchanges. The Fund may also enter into a Forward Contract on one currency in
order to hedge against risk of loss arising from fluctuations in the value of a
second currency (referred to as a "cross hedge") if, in the judgment of the
Adviser or a Sub-Adviser, a reasonable degree of correlation can be expected
between movements in the values of the two currencies. The Fund has established
procedures consistent with statements of the Securities and Exchange Commission
(the "SEC") and its staff regarding the use of Forward Contracts by registered
investment companies, which requires use of segregated assets or "cover" in
connection with the purchase and sale of such contracts.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities under present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the SEC. Such loans
will usually
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<PAGE> 9
be made only to member banks of the Federal Reserve System and member firms (and
subsidiaries thereof) of the New York Stock Exchange, and would be required to
be secured continuously by collateral, including cash, cash equivalents or U.S.
Government securities maintained on a current basis at an amount at least equal
to the market value of the securities loaned. As with other extensions of credit
there are risks of delay in recovery or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the loans would
be made only to entities deemed by the Adviser or a Sub-Adviser to be of good
standing, and when, in the judgment of the Adviser or a Sub-Adviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Adviser or a Sub-Adviser determines to make
securities loans, it is intended that the value of the securities loaned would
not exceed 30% of the value of the Fund's total assets.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES: Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. Although the Fund is
not limited to the amount of securities for which it may have commitments to
purchase on such basis, it is expected that under normal circumstances, the Fund
will not commit more than 30% of its assets to such purchases. The Fund does not
pay for the securities until received or start earning interest on them until
the contractual settlement date. In order to invest its assets immediately,
while awaiting delivery of securities purchased on such basis, the Fund will
hold cash, short-term money market instruments or U.S. Government securities in
a segregated account to pay for the commitment. Although the Fund does not
intend to make such purchases for speculative purposes, purchases of securities
on such bases may involve more risk than other types of purchases. For
additional information concerning these securities, see the Statement of
Additional Information.
PORTFOLIO TRADING: The Fund's portfolio will be managed actively and the asset
allocation among market sectors modified as the Adviser deems necessary. 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 or a
Sub-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. 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. Therefore, the rate of portfolio turnover is not a limiting
factor when a change in the portfolio is otherwise appropriate. It is
anticipated that the Fund's portfolio turnover rate will not exceed 100% during
the Fund's first fiscal year.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Fund's distributor, as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
From time to time, the Adviser may direct certain portfolio transactions to
broker-dealer firms which, in turn, have agreed to pay a portion of the Fund's
operating expenses (e.g., fee charged by the custodian of the Fund's assets).
For a further discussion of portfolio trading, see the Statement of Additional
Information.
5. RISK FACTORS
NON-DIVERSIFIED STATUS: The Fund has registered as a "non-diversified"
investment company. As a result, the Fund is limited as to the percentage of its
assets which may be invested in the securities of any one issuer only by its own
investment restrictions and the diversification requirements imposed by the
Internal Revenue Code of 1986 as amended (the "Code"). U.S. Government
securities which are generally considered free of credit risk and are assured as
to payment of principal and interest if held to maturity are not subject to any
investment limitation. Since the Fund may invest a relatively high percentage of
its assets in a limited number of issuers, the Fund may be more susceptible to
any single economic, political or regulatory occurrence and to the financial
conditions of the issuers in which it invests. For these reasons, an investment
in shares of the Fund should not be considered to constitute a complete
investment program and may not be appropriate for investors who cannot assume
the greater risk of capital depreciation inherent in seeking capital
appreciation and the risk associated with investing in foreign securities.
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<PAGE> 10
EMERGING GROWTH COMPANIES: The Fund may invest in securities of emerging growth
and established companies. Investing in emerging growth companies involves
greater risk than is customarily associated with investing in more established
companies. Emerging growth companies often have limited product lines, markets
or financial resources, and they may be dependent on one-person management. The
securities of emerging growth companies may have limited marketability and may
be subject to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general. Similarly, many of
the securities offering the capital appreciation sought by the Fund will involve
a higher degree of risk than would established growth stocks. The Fund will seek
to reduce risk by investing its assets in a number of markets and issuers,
performing credit analyses of potential investments and monitoring current
developments and trends in both the economy and financial markets.
FOREIGN SECURITIES: Transactions involving foreign equity or debt securities or
foreign currencies, and transactions entered into in foreign countries, involve
considerations and risks not typically associated with investing in U.S.
markets. These include changes in currency rates, exchange control regulations,
governmental administration or economic or monetary policy (in the U.S. or
abroad) or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. The Fund may invest up
to 100% (and expects generally to invest between 25% and 75%) of its assets in
foreign securities which are not traded on a U.S. exchange (not including
American Depositary Receipts). Special considerations may also include more
limited information about foreign issuers, higher brokerage costs, different or
less stringent 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 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 changes in
exchange rates and more limited information about foreign issuers.
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.
10
<PAGE> 11
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.
FOREIGN CURRENCIES: The value of the Fund's investments, and the value of
dividends and interest earned by the Fund, may be significantly affected by
changes in currency exchange rates. Some foreign currency values may be
volatile, and there is the possibility of governmental controls on currency
exchange or governmental intervention in currency markets, which could adversely
affect the Fund. Although the Adviser and Sub-Advisers may attempt to manage
currency exchange rate risks, there is no assurance that the Adviser and
Sub-Advisers will do so at an appropriate time or that the Adviser and
Sub-Advisers will be able to predict exchange rates accurately. For example, if
the Adviser and Sub-Advisers hedge the Fund's exposure to a foreign currency,
and that currency's value rises, the Fund will lose the opportunity to
participate in the currency's appreciation. The Fund may hold foreign currency
received in connection with investments in foreign securities, Forward Contracts
and Options on Foreign Currencies when, in the judgment of the Adviser or a
Sub-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 rates.
While the holding of foreign currencies will permit the Fund to take advantage
of favorable movements in the applicable exchange rate, it also exposes the Fund
to risk of loss if such rates move in a direction adverse to the Fund's
position. Such losses could also adversely affect the Fund's hedging strategies.
See "Investment Objective, Policies and Restrictions" in the Statement of
Additional Information for further discussion of the holding of foreign
currencies, as well as the associated risks.
RISKS OF INVESTING IN FIXED INCOME SECURITIES: To the extent the Fund invests
in fixed income securities, the net asset value of the Fund may change as the
general levels of interest rates fluctuate. When interest rates decline, the
value of fixed income securities can be expected to rise. Conversely, when
interest rates rise, the value of fixed income securities can be expected to
decline.
RISKS OF INVESTING IN LOWER RATED FIXED INCOME SECURITIES: As noted above, the
Fund may invest in fixed income securities that are in the lower rating
categories (rated Ba or lower by Moody's or BB or lower by S&P or by Fitch) and
comparable unrated securities (commonly known as "junk bonds"). 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 than securities in
the higher rating categories. 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, 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 certain adverse market conditions to sell these lower rated securities to
meet redemption requests or to respond to changes in the market.
The Fund may also invest in fixed income securities rated Baa by Moody's or BBB
by S&P or by Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, may have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities. See the
Statement of Additional Information for more information on lower rated
securities.
INVESTMENT TECHNIQUES: Although the Fund will enter into transactions in
Options, Options on Stock Indices, Forward Contracts, Futures Contracts, Options
on Futures Contracts and Options on Foreign Currencies for hedging purposes,
such transactions nevertheless involve certain risks. For example, a lack of
correlation between the instrument underlying an Option or Futures Contract and
the assets being hedged, or unexpected adverse price movements, could render the
Fund's hedging strategy
11
<PAGE> 12
unsuccessful and could result in losses. The Fund also may enter into
transactions in Options, Options on Stock Indices, Forward Contracts, Futures
Contracts and Options on Futures Contracts for other than hedging purposes, to
the extent permitted by applicable law, which involves greater risk. In
particular, such transactions may result in losses for the Fund which are not
offset by gains on other portfolio positions, thereby reducing gross income.
There also can be no assurance that a liquid secondary market will exist for any
contract purchased or sold, and the Fund may be required to maintain a position
until exercise or expiration, which could result in losses. The Statement of
Additional Information contains a description of the nature and trading
mechanics of Options, Options on Stock Indices, Futures Contracts, Options on
Futures Contracts, Forward Contracts and Options on Foreign Currencies, and
includes a discussion of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
Options and Futures Contracts traded by the Fund will include U.S. Government
securities as well as foreign securities.
------------------------------
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 a shareholder considered
appropriate at the time of investment in the Fund.
The Statement of Additional Information includes a discussion of investment
policies and a listing of specific investment restrictions which govern the
Fund's investment policies. The specific investment restrictions listed in the
Statement of Additional Information may not be changed without shareholder
approval. See "Investment Objective, Policies and Restrictions" in the Statement
of Additional Information.
The Fund's investment limitations, policies and rating standards are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated August 30, 1993 (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Toni Y. Shimura a Vice President
of the Adviser became one of the Fund's portfolio managers on March 1, 1995.
David R. Mannheim, a Vice President of the Adviser, has been one of the Fund's
portfolio managers since the Fund's inception. Ms. Shimura has been employed by
the Adviser since 1987. Mr. Mannheim has been employed by the Adviser since
1988. Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. For its services and facilities, the Adviser
receives an annual management fee computed and paid monthly, in an amount equal
to 0.90% of the average daily net assets of the Fund. For the Fund's fiscal year
ended October 31, 1994, MFS received management fees under the Advisory
Agreement of $2,183,204, equivalent on an annualized basis to 0.90% 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 Union
Standard Trust, MFS Institutional Trust, MFS Variable Insurance Trust, MFS/Sun
Life Series Trust, Sun Growth Variable Annuity Trust, Inc. and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly-owned subsidiary, MFS Asset Management,
Inc. provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under
12
<PAGE> 13
the management of the MFS organization were approximately $33.4 billion on
behalf of approximately 1.6 million investor accounts as of January 31, 1995. As
of such date, the MFS organization managed approximately $18.7 billion of assets
invested in fixed income funds and fixed income portfolios, approximately $3.1
billion of assets in foreign securities, and approximately $10.8 billion of
assets in equity securities. MFS is a subsidiary of Sun Life of Canada (U.S.),
which in turn is a subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John D. McNeil and John R. Gardner. Mr. Brodkin is the Chairman, Mr.
Shames is the President and Mr. Scott is the Secretary and a Senior Executive
Vice President of MFS. Messrs. McNeil and Gardner are the Chairman and
President, respectively, of Sun Life. Sun Life, a mutual life insurance company,
is one of the largest international life insurance companies and has been
operating in the United States since 1895, establishing a headquarters office
here in 1973. The executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman of MFS, is also the Chairman and President of the
Trust. Jeffrey L. Shames, John D. Laupheimer, Jr., Leslie J. Nanberg, James T.
Swanson, W. Thomas London, Stephen E. Cavan, James O. Yost and James R.
Bordewick, Jr., all of whom are officers of MFS, are officers of the Trust.
SUB-INVESTMENT ADVISERS -- The Advisory Agreement permits the Adviser from time
to time to engage one or more sub-advisers to assist in the performance of its
services. Pursuant to the Advisory Agreement, the Adviser has engaged Oechsle
International Advisers, L.P. ("Oechsle"), a Delaware limited partnership,
located at One International Place, Boston, Massachusetts, and Batterymarch
Financial Management, Inc. ("Batterymarch"), a Maryland corporation, located at
200 Clarendon Street, Boston, Massachusetts, as sub-advisers to the Fund.
Oechsle is an independent international investment adviser that has a history of
money management dating from 1986. As of January 31, 1995, Oechsle had
discretionary management authority with respect to approximately $6.5 billion of
assets. Batterymarch is a wholly-owned subsidiary of Legg Mason, Inc., a
Maryland Corporation. Batterymarch, together with its predecessor in interest,
Batterymarch Financial Management, a Massachusetts business trust, has a history
of money management dating from 1969. As of January 31, 1995 Batterymarch had
discretionary management authority with respect to approximately $4.8 billion of
assets including approximately $1.5 billion of assets in emerging market
securities.
Under the sub-advisory agreement between Oechsle and the Adviser dated August
30, 1993, the Adviser may delegate to Oechsle the authority to make investment
decisions for the Fund. It is presently intended that Oechsle will provide
portfolio management services for assets of the Fund to be invested in Western
Europe, Japan, Australia and New Zealand. Walter Oechsle is the portfolio
manager for the assets of the Fund allocated to Oechsle. Mr. Oechsle is the
managing general partner and chief financial officer of Oechsle and has been a
portfolio manager with Oechsle since the firm was formed in 1986. For its
services, the Adviser pays Oechsle an annual management fee, computed and paid
monthly, in an amount equal to 0.15% of the Fund's average daily net assets on
an annualized basis. For the fiscal year ended October 31, 1994, the Adviser
paid Oechsle $359,241 for its services.
Under the sub-advisory agreement between Batterymarch and the Adviser dated
January 18, 1995, the Adviser may delegate to Batterymarch the authority to make
investment decisions for the Fund. It is presently intended that Batterymarch
will provide portfolio management services for assets of the Fund to be invested
in emerging markets. Joseph C. Williams is the portfolio manager for the assets
of the Fund allocated to Batterymarch. Mr. Williams leads the emerging markets
investment activities of Batterymarch and has been a portfolio manager with the
predecessor of Batterymarch since 1994. Prior to joining Batterymarch, Mr.
Williams served as a director at Morgan Grenfell Investment Services in London.
For its services, the Adviser pays Batterymarch an annual management fee
computed and paid monthly, in an amount equal to 1.00% on an annualized basis of
the average daily net asset value of the Fund assets managed by Batterymarch.
For the Fund's fiscal year ended October 31, 1994, the Adviser paid Batterymarch
$389,337 for its services.
DISTRIBUTOR -- MFD, a wholly-owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor of each of the other funds in
the MFS Family of Funds (the "MFS Funds").
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly-owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
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<PAGE> 14
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions may also charge their customers fees
relating to investments in the Fund.
The Fund offers three classes of shares which bear sales charges and
distribution fees in different forms and amounts:
<TABLE>
CLASS A SHARES: Class A shares are offered at net asset value plus an initial sales charge (or CDSC in the case of certain
purchases of $1 million or more) as follows:
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SALES CHARGE* DEALER+ SALES CHARGE* DEALER
AS PERCENTAGE OF: ALLOWANCE AS PERCENTAGE OF: ALLOWANCE
------------------ AS A PER- ------------------- AS A PER-
NET CENTAGE OF NET CENTAGE OF
OFFERING AMOUNT OFFERING OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ------------------ -------- -------- ----------- ------------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$250,000 but less than
Less than $50,000............. 5.75% 6.10% 5.00% $500,000...................... 2.95% 3.04% 2.25%
$50,000 but less than $500,000 but less than
$100,000.................... 4.75 4.99 4.00 $1,000,000.................... 2.20 2.25 1.70
$100,000 but less than
$250,000.................... 4.00 4.17 3.20 $1,000,000 or more............ None** None** See Below**
<FN>
- ---------------
* Because of rounding in the calculation of offering price, actual sales charges may be more or less than those calculated using
the percentages above.
** A CDSC may apply in certain circumstances. MFD will pay commissions on purchases of $1 million or more. (See below.)
</TABLE>
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% on the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under Section 401(a) of the Code (a "Retirement Plan"), due to: (a) a
loan from the plan (repayments of loans, however, will constitute new sales for
purposes of assessing the CDSC); (b) "financial hardship" of the participant in
the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time; or (c) the death of a
participant, (iii) distributions from a 403(b) plan or an Individual Retirement
Account ("IRA"), due to death, disability or attainment of age 59 1/2; (iv)
tax-free returns of excess contributions to an IRA; (v) distributions by other
employee benefit plans to pay benefits; and (vi) certain involuntary redemptions
and redemptions in connection with certain automatic withdrawals from a
qualified retirement plan. The CDSC on Class A shares will not be waived,
however, if the Retirement Plan withdraws from the Fund except if the Retirement
Plan has invested its assets in Class A shares of one or more of the MFS Funds
for more than 10 years from the later to occur of (i) January 1, 1993 or (ii)
the date such Retirement Plan first invests its assets in Class A shares of one
or more of the MFS Funds, the CDSC on Class A shares will be waived in the case
of a redemption of all of the Retirement Plan's shares (including shares of any
other class) in all MFS Funds (i.e., all the assets of the Retirement Plan
invested in the MFS Funds are withdrawn), unless, immediately prior to the
redemption, the aggregate amount invested by the Retirement Plan in Class A
shares of the MFS Funds (excluding the reinvestment of distributions) during the
prior four year period equals 50% or more of the total value of the Retirement
Plan's assets in the MFS Funds, in which case the CDSC will not be waived. The
CDSC on Class A shares will be waived upon redemption by a Retirement Plan where
the
14
<PAGE> 15
redemption proceeds are used to pay expenses of the Retirement Plan or certain
expenses of participants under the Retirement Plan (e.g., participant account
fees), provided that the Retirement Plan's sponsor subscribes to the MFS
Fundamental 401(k) Plan(sm) or another similar recordkeeping system made
available by the Shareholder Servicing Agent. The CDSC on Class A shares will be
waived upon the transfer of registration from shares held by a Retirement Plan
through a single account maintained by the Shareholder Servicing Agent to
multiple Class A share accounts maintained by the Shareholder Servicing Agent on
behalf of individual participants in the Retirement Plan, provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. Any applicable CDSC will be deferred upon an exchange of Class A shares
of the Fund for units of participation of the MFS Fixed Fund (a bank collective
investment fund) (the "Units"), and the CDSC will be deducted from the
redemption proceeds when such Units are subsequently redeemed (assuming the CDSC
is then payable). No CDSC will be assessed upon an exchange of Units for Class A
shares of the Fund. For purposes of calculating the CDSC payable upon redemption
of Class A shares of the Fund or Units acquired pursuant to one or more
exchanges, the period during which the Units are held will be aggregated with
the period during which the Class A shares are held. MFD will receive all CDSCs
which it intends to apply for the benefit of the Fund.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or a 36-month period for purchases of $1 million or
more) or special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchases privileges by which the sales charge may be
reduced is set forth in the Statement of Additional Information. In addition MFD
pays a commission to dealers who initiate and are responsible for purchases of
Class A shares of $1 million or more as follows: 1.00% on sales up to $5
million; plus 0.25% on the amount in excess of $5 million. Purchases of $1
million or more for each shareholder account will be aggregated over a 12-month
period (commencing from the date of the first such purchase) for purposes of
determining the level of commissions to be paid during that period with respect
to such account.
Class A shares of the Fund may be sold at their net asset value to the officers
of the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided such shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pension,
profit-sharing or other Retirement Plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may also be sold at their net asset value to any
employee or registered representative of any dealer or other financial
institution which has a sales agreement with MFD or its affiliates, to certain
family members of such employee or representative and their spouses, or to any
trust, pension, profit-sharing or other Retirement Plan for the sole benefit of
such employee or representative, as well as clients of the MFS Asset Management,
Inc. Class A shares may be sold at net asset value, subject to appropriate
documentation, through a dealer where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge or a deferred sales charge (whether or not
actually imposed); (ii) such redemption has occurred no more than 90 days prior
to the purchase of Class A shares of the Fund; and (iii) the Fund, MFD or its
affiliates have not agreed with such company or its affiliates, formally or
informally, to sell Class A shares at net asset value or provide any other
incentive with respect to such redemption and sale. Class A shares of the Fund
may also be sold at net asset value where the amount invested represents
redemption proceeds from the MFS Fixed Fund. In addition, Class A shares may
also be sold at their net asset value in connection with the acquisition or
liquidation of the assets of other investment companies or personal holding
15
<PAGE> 16
companies. Insurance company separate accounts may also purchase Class A shares
of the Fund at their net asset value. Class A shares of the Fund may be
purchased at net asset value by Retirement Plans whose third party
administrators have entered into an administrative services agreement with MFD
or one or more of its affiliates to perform certain administrative services,
subject to certain operational requirements specified from time to time by MFD
or one or more of its affiliates. Class A shares of the Fund may be purchased at
net asset value through certain broker-dealers and other financial institutions
which have entered into an agreement with MFD, which includes a requirement that
such shares be sold for the benefit of clients participating in a "wrap account"
or a similar program under which such clients pay a fee to such broker-dealer or
other financial institution.
Class A shares of the Fund may be purchased at net asset value by Retirement
Plans qualified under Section 401(k) of the Code through certain broker-dealers
and other financial institutions which have entered into an agreement with MFD
which includes certain minimum size qualifications for such Retirement Plans and
provides that the broker-dealer or other financial institution will perform
certain administrative services with respect to the plan's account.
Class A shares of the Fund may be purchased at net asset value by certain
retirement plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) the sponsoring organization must demonstrate to the satisfaction of MFD
that either (a) the employer has at least 25 employees or (b) the aggregate
purchases by the Retirement Plan of Class A shares of the MFS Funds will be
in an amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that MFD may pay a commission, on sales in excess of $5 million to
certain retirement plans, of 1.00% to certain dealers which, at MFD's
invitation, enter into an agreement with MFD in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by MFD. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account. Class A
shares of the Fund may also be sold at net asset value through the automatic
reinvestment of Class A and Class B periodic distributions which constitute
required withdrawals from qualified retirement plans. Furthermore, Class A
shares of the Fund may be sold at net asset value through the automatic
reinvestment of distributions of dividends and capital gains of Class A shares
of other MFS Funds pursuant to the Distribution Investment Program (see
"Shareholder Services" in the Statement of Additional Information).
<TABLE>
CLASS B SHARES: Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC as follows:
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
- --------------- --------------
<S> <C>
First................................................. 4%*
Second................................................ 4%
Third................................................. 3%
Fourth................................................ 3%
Fifth................................................. 2%
Sixth................................................. 1%
Seventh and following................................. 0%
<FN>
- ------------------
* Class B shares purchased between January 1, 1993 and September 1, 1993 will be
subject to a CDSC of 5% in the event of a redemption within the first year
after purchase.
</TABLE>
16
<PAGE> 17
<TABLE>
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
- --------------- --------------
<S> <C>
First................................................. 6%
Second................................................ 5%
Third................................................. 4%
Fourth................................................ 3%
Fifth................................................. 2%
Sixth................................................. 1%
Seventh and following................................. 0%
</TABLE>
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and Repurchases --
Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for
the benefit of the deceased or disabled individual. The CDSC on Class B shares
will also be waived in the case of redemptions of shares of the Fund pursuant
to a systematic withdrawal plan. In addition, the CDSC on Class B shares will
be waived in the case of distributions from an IRA, SAR-SEP or any other
retirement plan qualified under Section 401(a) or 403(b) of the Code due to
death or disability, or in the case of required minimum distributions from any
such retirement plan due to attainment of age 70 1/2. The CDSC on Class B
shares will be waived in the case of distributions from a retirement plan
qualified under Section 401(a) of the Code due to (i) returns of excess
contribution to the plan, (ii) retirement of a participant in the plan, (iii) a
loan from the plan (repayments of loans, however, will constitute new sales for
purposes of assessing the CDSC), (iv) "financial hardship" of the participant
in the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time, and (v) termination of
employment of the participant in the plan (excluding, however, a partial or
other termination of the plan). The CDSC on Class B shares will be waived in
the case of distributions from SAR-SEP due to (i) returns of excess
contribution to the plan, (ii) retirement of a participant in the plan and
(iii) termination of employment of the participant in the plan (excluding,
however, a partial or other termination of the plan). The CDSC on Class B
shares will also be waived upon redemption by (i) officers of the Trust, (ii)
any of the subsidiary companies of Sun Life, (iii) eligible Directors,
officers, employees (including retired employees) and agents of MFS, Sun Life
or any of their subsidiary companies, (iv) any trust, pension, profit-sharing
or any other benefit plan for such persons, (v) any trustees and retired
trustees of any investment company for which MFD serves as distributor or
principal underwriter, and (vi) certain family members of such individuals and
their spouses, provided in each case that the shares will not be resold except
to the Fund. The CDSC on Class B shares will also be waived in the case of
redemptions by any employee or registered representative of any dealer or other
financial institution which has a sales agreement with MFD, by certain family
members of such employee or representative and their spouses, by any trust,
pension, profit-sharing or other retirement plan for the sole benefit of such
employee or representative and by clients of the MFS Asset Management Inc. A
Retirement Plan that has invested its assets in Class B shares of one or more
of the funds in the MFS Funds for more than 10 years from the later to occur of
(i) January 1, 1993 or (ii) the date the Retirement Plan first invests its
assets in Class B shares of one or more of the funds in the MFS Funds will have
the CDSC on Class B shares waived in the case of a redemption of all the
Retirement Plan's shares (including any shares of any other class) in all MFS
Funds (i.e., all the assets of the Retirement Plan invested in the MFS Funds
are withdrawn), except that if, immediately prior to the redemption, the
aggregate amount invested by the Retirement Plan in Class B shares of the MFS
Funds (excluding the reinvestment of distributions) during the prior four year
period equals 50% or more of the total value of the Retirement Plan's assets in
the MFS Funds, then the CDSC will not be waived.
17
<PAGE> 18
The CDSC on Class B shares will be waived upon redemption by a Retirement Plan
where the redemption proceeds are used to pay expenses of the Retirement Plan or
certain expenses of participants under the Retirement Plan (e.g., participant
account fees), provided that the Retirement Plan's sponsor subscribes to the MFS
Fundamental 401(k)(sm) or another similar recordkeeping system made available by
the Shareholder Servicing Agent. The CDSC on Class B shares will be waived upon
the transfer of registration from shares held by a Retirement Plan through a
single account maintained by the Shareholder Servicing Agent to multiple Class B
share accounts maintained by the Shareholder Servicing Agent on behalf of
individual participants in the Retirement Plan, provided that the Retirement
Plan's sponsor subscribes to the MFS Fundamental 40(k)(sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. The CDSC
on Class B shares may also be waived in connection with the acquisition or
liquidation of the assets of other investment companies or personal holding
companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund will convert to
Class A shares of the Fund approximately eight years after the purchase date.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Distribution Plan applicable to
Class B shares. However, for purposes of conversion to Class A shares, all
shares in a shareholder's account that were purchased through the reinvestment
of dividends and distributions paid in respect of Class B shares (and which have
not converted to Class A shares as provided in the following sentence) will be
held in a separate sub-account. Each time any Class B shares in the
shareholder's account (other than those in the sub-account) convert to Class A
shares, a portion of the Class B shares then in the sub-account will also
convert to Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends and
distributions that are converting to Class A shares bear to the shareholder's
total Class B shares not acquired through such reinvestment. The conversion of
Class B shares to Class A shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversion will not constitute a taxable event for Federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B shares to Class A shares will not occur if such ruling or
opinion is not available. In such event, Class B shares would continue to be
subject to higher expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge or a CDSC. 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 $5,000,000 per transaction.
Class C shares are not currently available for purchase by any retirement plan
qualified under Section 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar Section 401(a) or 403(b) recordkeeping program made available
by the Shareholder Servicing Agent.
GENERAL: Except as described below, the minimum initial investment is $1,000
per account and the minimum additional investment is $50 per account. Accounts
being established for monthly automatic investments and under payroll savings
programs and tax-deferred retirement programs (other than IRAs) involving the
submission of investments by means of group remittal statements are subject to a
$50 minimum on initial and additional investments per account. The minimum
initial investment for IRAs is $250 per account and the minimum additional
investment is $50 per account. Accounts being established for participation in
the Automatic Exchange Plan are subject to a $50 minimum on initial and
additional investments per account. There are also other limited exceptions to
these minimums for certain tax-deferred retirement programs. Any minimums may be
changed at any time at the discretion of MFD. The Fund reserves the right to
cease offering its shares at any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the automatic investment plan) or other shareholder services, MFD or its
affiliates may either (i) give a gift of nominal value, such as a hand-held
calculator, or (ii) make a nominal charitable contribution on their behalf.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer might not receive many of the privileges and services from the
Fund (such as Right of Accumulation, Letter of Intent and certain recordkeeping
services) that the Fund ordinarily provides.
18
<PAGE> 19
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purpose is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter; or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds, which may include the Fund and which may change from time to
time. The Fund and MFD each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A, Class B and Class C shares. In
some instances, promotional incentives to dealers may be offered only to certain
dealers who have sold or may sell significant amounts of Fund shares. From time
to time, MFD may pay dealers 100% of the applicable sales charge on sales of
Class A shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, MFD or its affiliates may, from time to
time, pay dealers an additional commission equal to 0.50% of the net asset value
of all of the Class B shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, from time to time MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. The staff
of the SEC has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives and members of their families or other invited guests
to various locations for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more MFS Funds, and/or
other dealer-sponsored events. In some instances, these concessions may be
offered to dealers or only to certain dealers who have sold or may sell, during
specified periods, certain minimum amounts of shares of the Fund. From time to
time, MFD may make expense reimbursements for special training of a dealer's
registered representatives in group meetings or to help pay the expenses of
sales contests. Other concessions may be offered to the extent not prohibited by
the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. (the "NASD").
The Glass-Steagall Act prohibits national banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of the
prohibition has not been clearly defined, MFD believes that such Act should not
preclude banks from entering into agency agreements with MFD (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequences as a result of
these occurrences. In addition, state securities laws on this issue may differ
from the interpretation of federal law expressed herein and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e. an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. In addition, Class C
shares may be exchanged for shares of MFS Money Market Fund at net asset value.
Shares of one class may not be exchanged for shares of any other class.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent in proper form (i.e., if in writing-signed by the record
owner(s) exactly as the shares are registered; if by
19
<PAGE> 20
telephone-proper account identification is given by the dealer or shareholder of
record); and each exchange must involve either shares having an aggregate value
of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS FUNDamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by MFS Service Center, Inc.)
or all the shares in the account. If the Exchange Request is received by the
Shareholder Servicing Agent on any business day prior to the close of regular
trading on the New York Stock Exchange (the "Exchange"), the exchange usually
will occur on that day if all the requirements set forth above have been
complied with at that time. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
investment dealers or the Shareholder Servicing Agent. A shareholder should read
the prospectus of the other MFS Fund and consider the differences in objectives
and policies before making any exchange. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone see "Redemptions By Telephone". The
exchange privilege (or any aspect of it) may be changed or discontinued and is
subject to certain limitations, including certain restrictions on purchases by
market timers. Special procedures, privileges and restrictions with respect to
exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuate,
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. 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 15 days from the purchase date
in an effort to assure that such check has cleared. Payment of redemption
proceeds may be delayed for up to seven days from the redemption date if the
Fund determines that such a delay would be in the best interest of all its
shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption, or letter of instruction, together with his share
certificates (if any were issued) all in "good order" for transfer. "Good order"
generally means that the stock power, written request for redemption, letter of
instruction or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed in the manner
set forth below under the caption "Signature Guarantee." In addition, in some
cases, "good order" may require the furnishing of additional documents. The
Shareholder Servicing Agent may make certain de minimis exceptions to the above
requirements for redemption. Within seven days after receipt of a redemption
request by the Shareholder Servicing Agent in "good order," the Fund will make
payment in cash of the net asset value of the shares next determined after such
redemption request was received, reduced by the amount of any applicable CDSC
described above and the amount of any income tax required to be withheld, except
during any period in which the right of redemption is suspended or date of
payment is postponed because the Exchange is closed or trading on the Exchange
is restricted, or, to the extent otherwise permitted by the 1940 Act, if an
emergency exists.
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee." The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service,
20
<PAGE> 21
investors may arrange to have proceeds in excess of $1,000 wired in federal
funds to the designated account. If a telephone redemption request is received
by the Shareholder Servicing Agent by the close of regular trading on the
Exchange on any business day, shares will be redeemed at the closing net asset
value of the Fund on that day. Subject to the conditions described in this
section, proceeds of a redemption are normally mailed or wired on the next
business day following the date of receipt of the order for redemption. The
Shareholder Servicing Agent will not be responsible for any losses resulting
from unauthorized telephone transactions if it follows reasonable procedures
designed to verify the identity of the caller. The Shareholder Servicing Agent
will request personal or other information from the caller, and will normally
also record calls. Shareholders should verify the accuracy of confirmation
statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
their net asset value through his securities dealer (a repurchase), the
shareholder can place a repurchase order with his dealer, who may charge the
shareholder a fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE
CLOSE OF REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD ON THE SAME
DAY BEFORE MFD CLOSES FOR BUSINESS, THE SHAREHOLDER WILL RECEIVE THE NET ASSET
VALUE CALCULATED ON THAT DAY.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-time
right to reinvest the redemption proceeds in the same class of shares of any of
the MFS Funds (if shares of such Fund are available for sale) at net asset value
(with a credit for any CDSC paid) within 90 days of the redemption pursuant to
the Reinstatement Privilege. If the shares credited for any CDSC paid are then
redeemed within six years of the initial purchase in the case of Class B shares,
or within twelve months for certain Class A share purchases, a CDSC will be
imposed upon redemption. Such purchases under the Reinstatement Privilege are
subject to all limitations in the Statement of Additional Information regarding
this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of portfolio
securities (instead of cash). The securities so distributed would be valued at
the same amount as that assigned to them in calculating the net asset value for
the shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur transaction, tax or other charges when converting the
securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts established for monthly automatic investments and certain payroll
savings programs, Automatic Exchange Plan accounts and tax-deferred retirement
plans, for which there is a lower minimum investment requirement. See
"Purchases." Shareholders will be notified that the value of their account is
less than the minimum investment requirement and allowed 60 days to make an
additional investment before the redemption is processed. No CDSC will be
imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE -- Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of 12 months (in the
case of purchases of $1 million or more of Class A shares) or six years (in the
case of purchases of Class B shares). Purchases of Class A shares made during a
calendar month, regardless of when during the month the investment occurred,
will age one month on the last day of the month and each subsequent month. Class
B shares of any MFS Fund 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 the Class B shares of any MFS 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
21
<PAGE> 22
and each subsequent year. At the time of a redemption, the amount by which the
value of a shareholder's account represented by Direct Purchases exceeds the sum
of the six calendar year aggregations (12 months in the case of purchases of $1
million or more of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of 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 will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule"), after having concluded that there is a reasonable
likelihood that the plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the
Fund will pay MFD a distribution/service fee aggregating up to (but not
necessarily all of) 0.35% of the average daily net assets attributable to Class
A shares annually in order that MFD may pay expenses on behalf of the Fund
related to the distribution and servicing of Class A shares. The expenses to be
paid by MFD on behalf of the Fund include a service fee to securities dealers
which enter into a sales agreement with MFD of up to 0.25% of the Fund's average
daily net assets attributable to Class A shares that are owned by investors for
whom such securities dealer is the holder or dealer of record. This fee is
intended to be partial consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class A shares. MFD
may from time to time reduce the amount of the service fee paid for shares sold
prior to a certain date. MFD may also retain a distribution fee of 0.10% of the
Fund's average daily net assets attributable to Class A shares as partial
consideration for services performed and expenses incurred in the performance of
MFD's obligations under its Class A Distribution Agreement with the Fund. MFD is
currently waiving this 0.10% distribution fee. This waiver may be rescinded at
any time by MFD without notice to shareholders. In addition, to the extent that
the aggregate of the foregoing fees does not exceed 0.35% per annum of the
average daily net assets of the Fund attributable to Class A shares, the Fund is
permitted to pay other distribution-related expenses, including commissions to
dealers and payments to wholesalers employed by MFD for sales at or above a
certain dollar level. Fees payable under the Class A Distribution Plan are
charged to, and therefore reduce, income allocated to Class A shares. Service
fees may be reduced for a securities dealer that is the holder or dealer of
record for an investor who owns shares of the Fund having 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 Class A
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts. Certain banks and other financial institutions that
have agency agreements with MFD will receive service fees that are the same as
service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the Fund
will pay MFD a daily distribution fee payable monthly and equal on an annual
basis to 0.75% of the Fund's average daily net assets attributable to Class B
shares and will pay MFD a service fee of up to 0.25% per annum of the Fund's
average daily net assets attributable to Class B shares (which MFD will in turn
pay to securities dealers which enter into a sales agreement with MFD at a rate
of up to 0.25% of the Fund's average daily net assets attributable to Class B
shares owned by investors for whom that securities dealer is the holder or
dealer of record). This service fee is intended to be additional consideration
for all personal services and/or account maintenance services
22
<PAGE> 23
rendered by the dealer with respect to Class B shares. Fees payable under the
Class B Distribution Plan are charged to, and therefore reduce, income allocated
to Class B shares. The Class B Distribution Plan also provides that MFD will
receive all CDSCs attributable to Class B shares (see "Redemptions and
Repurchases" above), which do not reduce the distribution fee. MFD will pay
commissions to dealers of 3.75% of the purchase price of Class B shares
purchased through dealers. MFD will also advance to dealers the first year
service fee at a rate equal to 0.25% of the purchase price of such shares and,
as compensation therefor, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Therefore, the total
amount paid to a dealer upon the sale of shares is 4.00% of the purchase price
of the shares (commission rate of 3.75% plus service fee equal to 0.25% of the
purchase price). Dealers will become eligible for additional service fees with
respect to such shares commencing in the thirteenth month following purchase.
Dealers may from time to time be required to meet certain criteria in order to
receive service fees. MFD or its affiliates are entitled to retain all service
fees payable under the Class B Distribution Plan with respect to accounts for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
The purpose of the distribution payments to MFD under the Class B Distribution
Plan is to compensate MFD for its distribution services to the Fund. Since MFD's
compensation is not directly tied to its expenses, the amount of compensation
received by MFD during any year may be more or less than its actual expenses.
For this reason, this type of distribution fee arrangement is characterized by
the staff of the SEC as being of the "compensation" variety. However, the Fund
is not liable for any expenses incurred by MFD in excess of the amount of
compensation it receives. The expenses incurred by MFD, including commissions to
dealers, are likely to be greater than the distribution fees for the next
several years, but thereafter such expenses may be less than the amount of the
distribution fees. Certain banks and other financial institutions that have
agency agreements with MFD will receive agency transaction and service fees that
are the same as commissions and service fees to dealers.
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the Fund
will pay MFD a distribution fee of up to 0.75% per annum of the Fund's average
daily net assets attributable to Class C shares and will pay MFD a service fee
of up to 0.25% per annum of the Fund's average daily net assets attributable to
Class C shares (which MFD in turn pays to securities dealers which enter into a
sales agreement with MFD at a rate of up to 0.25% per annum of the Fund's daily
net assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record). The distribution/service
fees attributable to Class C shares are designed to permit an investor to
purchase such shares through a broker-dealer without the assessment of an
initial sales charge or a CDSC while allowing MFD to compensate broker-dealers
in connection with the sale of such shares. The service fee is intended to be
additional consideration for all personal services and/or account maintenance
services rendered with respect to Class C shares. MFD or its affiliates are
entitled to retain all service fees payable under the Class C Distribution Plan
with respect to accounts for which there is no dealer of record as partial
consideration for personal services and/or account maintenance services
performed by MFD or its affiliates for shareholder accounts.
The purpose of the distribution payments to MFD under the Class C Distribution
Plan is to compensate MFD for its distribution services to the Fund.
Distribution payments under the Plan will be used by MFD to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom that securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
or dealer of record.) MFD also pays 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 compensation of personnel and all costs of travel,
office expense and equipment. Since MFD's compensation is not directly tied to
its expenses, the amount of compensation received by MFD during any year may be
more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares.
23
<PAGE> 24
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income 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. If the Fund earns less than projected, or otherwise
distributes more than its earnings for the year, a portion of the distributions
may constitute a return of capital. 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 Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes, although foreign-source income
received by the Fund may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or additional shares. A portion of
the dividends received from the Fund (but none of the Fund's capital gains
distributions) may qualify for the dividends-received deduction for
corporations. A statement setting forth the federal income tax status of all
dividends and distributions for that year, including the portion taxable as
ordinary income, the portion taxable as long-term capital gain, the portion, if
any, representing a return of capital (which is free of current taxes but
results in a basis reduction) and the amount, if any, of federal income tax
withheld will be sent to each shareholder promptly after the end of such year.
In certain circumstances, the Fund may also elect to "pass through" to
shareholders foreign income taxes paid by the Fund. Under those circumstances,
the Fund will notify shareholders of their pro rata portion of the foreign
income taxes paid by the Fund; shareholders may be eligible for foreign tax
credits or deductions with respect to those taxes, but will be required to treat
the amount of the taxes as an amount distributed to them and thus includible in
their gross income for federal income tax purposes.
The Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable law or
treaty. The Fund is also required in certain circumstances to apply backup
withholding of 31% on dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. However, backup withholding will not
be applied on payments which have had 30% withholding taken. Prospective
Shareholders should read the Account Application for information regarding
backup withholding of federal income tax and should consult their own tax
advisers as to the tax consequences of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the
Statement of Additional Information. All investments and assets are expressed in
U.S. dollars based upon current currency exchange rates. The net asset value per
share of each class of shares is effective for orders received by the dealer
prior to its calculation and received by MFD prior to the close of that business
day.
24
<PAGE> 25
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares, entitled
Class A, Class B and Class C shares of Beneficial Interest (without par value).
The Trust has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees and
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Trust's Declaration of Trust provides that a Trustee may be removed from
office in certain instances (see "Description of Shares, Voting Rights and
Liabilities" in the Statement of Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in a class of the Fund made at the maximum public offering price
of the shares of that class with all distributions reinvested and which, if
quoted for periods of six years or less, will give effect to the imposition of
the CDSC assessed upon redemptions of the Fund's Class B shares. Such total rate
of return quotations may be accompanied by quotations which do not reflect the
reduction in value of the initial investment due to the sales charge or the
deduction of a CDSC, and which will thus be higher. The Fund's total rate of
return quotations are based on historical performance and are not intended to
indicate future performance. The Fund's quotations may from time to time be used
in advertisements, shareholder reports or other communications to shareholders.
For a discussion of the manner in which the Fund will calculate its total rate
of return, see the Statement of Additional Information. For further information
about the Fund's performance for the fiscal year ended October 31, 1994, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time make a list of all
or a portion of its holdings available to investors upon request.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status").
25
<PAGE> 26
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to having all
dividends and other distributions reinvested in additional shares. Any request
to change a distribution option must be received by the Shareholder Servicing
Agent by the record date for a dividend or distribution in order to be effective
for that dividend or distribution. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund:
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the Statement of Additional Information) anticipates purchasing
$50,000 or more of Class A shares of the Fund alone or in combination with
shares of Class B or Class C shares 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 for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value in shares of the same class of another
MFS Fund, if shares of such Fund are available for sale (without a sales charge
and not subject to any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments, as designated on the Account Application and based upon the value of
his account. Each payment under a Systematic Withdrawal Plan (a "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 CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
26
<PAGE> 27
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to four different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the Statement of Additional
Information for further information concerning the Automatic Exchange Plan.
Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal program
would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class 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 Statement of Additional Information, dated March 1, 1995, contains
more detailed information about the Fund, including information related to (i)
the Fund's investment policies and restrictions, including the purchase and sale
of Options, Options on Stock Indices, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies; (ii) the
Trustees, officers and investment adviser and sub-investment advisers; (iii)
portfolio trading; (iv) the shares, including rights and liabilities of
shareholders; (v) tax status of dividends and distributions; (vi) the
Distribution Plans; and (vii) various services and privileges provided by the
Fund for the benefit of its shareholders, including additional information with
respect to the exchange privilege.
27
<PAGE> 28
[MFS LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116 MFS(R) WORLD GROWTH FUND
(617) 954-5000
Distributor Prospectus
MFS Fund Distributors, Inc. March 1, 1995
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank & Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Accountants
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[MFS LOGO]
MFS(R) WORLD GROWTH FUND
500 Boylston Street
Boston, MA 02116
MWF-1-3/95/280M 9/209/309
<PAGE> 29
MFS WORLD GROWTH FUND
(A SERIES OF MFS SERIES TRUST VIII)
SUPPLEMENT TO BE AFFIXED TO THE CURRENT
PROSPECTUS FOR DISTRIBUTION IN OHIO
Prospective Ohio investors should note the following:
a) This Prospectus must be delivered to the investor prior to
consummation of the sale;
b) The Fund may purchase the securities of any issuer such that, as to
50% of the value of the Fund's assets, such purchase, at the time thereof,
would cause more than 10% of the outstanding voting securities of such issuer
to be held by the Fund;
c) The Fund may invest up to 50% of its assets in restricted
securities, including Rule 144A securities which have been deemed to be liquid
by the Board of Trustees.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1995.
<PAGE> 30
MFS WORLD GROWTH FUND
(A SERIES OF MFS SERIES TRUST VIII)
SUPPLEMENT TO BE AFFIXED TO THE CURRENT
PROSPECTUS FOR DISTRIBUTION IN ARIZONA
An investment in this Fund may be considered high risk.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1995.
<PAGE> 31
[LOGO]
<TABLE>
MFS(R) WORLD
GROWTH FUND
STATEMENT OF
ADDITIONAL INFORMATION
March 1, 1995
(A member of the MFS Family of Funds(R))
- --------------------------------------------------------------------------------------------------
<CAPTION>
Page
----
<S> <C> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Fund................................................................ 12
Trustees........................................................................... 12
Officers........................................................................... 12
Investment Adviser................................................................. 13
Sub-Advisers....................................................................... 14
Custodian.......................................................................... 14
Shareholder Servicing Agent........................................................ 15
Distributor........................................................................ 15
4. Portfolio Transactions and Brokerage Commissions...................................... 16
5. Shareholder Services.................................................................. 17
Investment and Withdrawal Programs................................................. 17
Exchange Privilege................................................................. 19
Tax-Deferred Retirement Plans...................................................... 20
6. Tax Status............................................................................ 20
7. Distribution Plans.................................................................... 21
8. Determination of Net Asset Value and Performance...................................... 23
9. Description of Shares, Voting Rights and Liabilities.................................. 25
10. Independent Accountants and Financial Statements...................................... 26
11. Appendix A............................................................................ 27
</TABLE>
MFS WORLD GROWTH FUND
A Series of MFS Series Trust VIII
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus dated March 1, 1995. This Statement of Additional Information 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 STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
<PAGE> 32
<TABLE>
1. DEFINITIONS
<S> <C> <C>
"Fund" -- MFS(R) World Growth Fund,
a non-diversified series
of MFS Series Trust VIII,
(the "Trust"), a
Massachusetts business
trust.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a
Delaware corporation.
"Sub-Advisers" -- Oechsle International
Advisers, L.P., a Delaware
limited partnership.
("Oechsle") and Battery-
march Financial Management
Inc., a Maryland
corporation,
("Batterymarch")
"MFD" -- MFS Fund Distributors
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus, dated
March 1, 1995, of the
Fund.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND
RESTRICTIONS
INVESTMENT OBJECTIVE AND POLICIES. The investment objective and policies of the
Fund are described in the Prospectus and below. The following discussion of the
Fund's investment policies and restrictions supplements and should be read in
conjunction with the information set forth in the "Investment Objective and
Policies" section of the Prospectus.
Investing in both U.S. and foreign stocks reduces the impact on a portfolio of
any one country's economy, and can provide access to the world's best performing
markets. Twenty five years ago, U.S. companies represented about two-thirds of
world stock market capitalization. Now the United States accounts for only about
one-third of the world market, with non-U.S. companies making up about two
thirds. Other economies, particularly in Asia, are growing at much higher rates
than in the United States. The cumulative returns of an index representing
investments in European, Australian, New Zealand and Far Eastern stocks have
been greater, over long time periods, than those of an index representing
returns in U.S. stocks only. In each of the past four years, however, non-U.S.
stocks, as a group, have underperformed U.S. stocks, creating unusual
opportunities for investors seeking attractive valuations.
FOREIGN SECURITIES: The Fund may invest up to 100% (and expects generally to
invest between 25% and 75%) of its assets in foreign securities as discussed in
the Prospectus (not including American Depositary Receipts). Investments in
foreign issues involve considerations and possible risks not typically
associated with investments in securities issued by domestic companies or with
debt securities issued by foreign governments. There may be less publicly
available information about a foreign company than about a domestic company, and
many foreign companies are not subject to accounting, auditing and financial
reporting standards and requirements comparable to those to which U.S. companies
are subject. Foreign securities markets, while growing in volume, have
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable domestic companies. Fixed brokerage commissions and other transaction
costs on foreign securities exchanges are generally higher than in the United
States. There is also less government supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the United States.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depository
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. The Fund may invest in either type
of ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depository receipts in the
United States can reduce costs and delays as well as potential currency exchange
and other difficulties. The Fund may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Fund may also invest in other
investment companies (i) as a means by which the Fund may invest in securities
of certain countries which do not otherwise permit investment, (ii) as a means
to purchase securities of emerging markets companies having limited free-float,
or (iii) when the Adviser or a Sub-Adviser believes such investments may be more
advantageous to the Fund than a direct market purchase of securities. The Fund's
investment in other investment companies is limited in amount by the Investment
Company Act of 1940, as amended (the "1940 Act"), so that the Fund may purchase
shares in another investment company unless (i) such a purchase would cause the
Fund to own in aggregate more than 3% of the total outstanding voting stock of
the company or (ii) such a purchase would cause the Fund to have more than 5% of
its total assets invested in one investment company or more than 10% of its
total assets invested in aggregate in all other investment companies. Such
investment may also involve the payment of substantial premiums above the value
of such investment companies' portfolio securities, and the total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
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REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange (the "Exchange"), members of the Federal Reserve System, recognized
primary U.S. Government securities dealers or institutions which the Adviser or
a Sub-Adviser has determined to be of comparable creditworthiness. The
securities that the Fund purchases and holds through its agent are U.S.
Government securities, the values of which are equal to or greater than the
repurchase price agreed to be paid by the seller. The repurchase price may be
higher than the purchase price, the difference being income to the Fund, or the
purchase and repurchase prices may be the same, with interest at a standard rate
due to the Fund together with the repurchase price on repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the U.S.
Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser or a Sub-Adviser has
determined that the seller is creditworthy, and the Adviser or a Sub-Adviser
monitors that seller's creditworthiness on an ongoing basis. Moreover, under
such agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the securities
falls below the agreed upon margin.
RISKS OF INVESTING IN LOWER RATED BONDS: Debt securities in which the Fund may
invest may be in the lower rating categories of recognized rating agencies (that
is, ratings of Ba or lower by Moody's Investors Service, Inc. ("Moody's") or BB
or lower by Standard & Poor's Ratings Group ("S&P") or by Fitch Investors
Service Inc., ("Fitch")) (and comparable unrated securities) (commonly known as
"junk bonds"). For a description of these and other rating categories, see
Appendix A. No minimum rating standard is required for a purchase by the Fund.
These securities are considered speculative and, while generally providing
greater income than investments in higher rated securities, will involve greater
risk of principal and income (including the possibility of default or bankruptcy
of the issuers of such securities) and may involve greater volatility of price
(especially during periods of economic uncertainty or change) than securities in
the higher rating categories and, because yields vary over time, no specific
level of income can ever be assured. These lower rated, high yielding fixed
income securities generally tend to be affected by economic changes (and the
outlook for economic growth), short-term corporate and industry developments and
the market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities, which react
primarily to fluctuations in the general level of interest rates (although these
lower rated securities are also affected by changes in interest rates as
described in the Prospectus under "Risk Factors"). In the past, economic
downturns or an increase in interest rates have, under certain circumstances,
caused a higher incidence of default by the issuers of these securities and may
do so in the future, especially in the case of highly leveraged issuers. During
certain periods, the higher yields on the Fund's lower rated, high yielding
fixed income securities are paid primarily because of the increased risk of loss
of principal and income, arising from such factors as the heightened possibility
of default or bankruptcy of the issuers of such securities. Due to the fixed
income payments of these securities, the Fund may continue to earn the same
level of interest income while its net asset value declines due to portfolio
losses, which could result in an increase in the Fund's yield despite the actual
loss of principal. The prices for these securities may be affected by
legislative and regulatory developments. For example, federal rules require that
savings and loan associations gradually reduce their holdings of high-yield
securities. An effect of such legislation may be to depress the prices of
outstanding lower rated, high yielding fixed income securities. 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 or Sub-Adviser's judgment may at times
play a greater role in valuing these securities than in the case of investment
grade fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser or a Sub-Adviser may refer to ratings issued by established
credit rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such ratings
with the Adviser's or a Sub-Adviser's own independent and ongoing review of
credit quality. The Fund's achievement of its investment objective may be more
dependent on the Adviser's or a Sub-Adviser's own credit analysis than in the
case of an investment company primarily investing in higher quality fixed income
securities.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related 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
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<PAGE> 34
automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, 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.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities ("Options") and purchase call and put Options. An Option provides the
purchaser, or "holder", with the right, but not the obligation, to purchase, in
the case of a "call" Option, or sell, in the case of a "put" Option, the
security or securities in connection with which the Option was written, for a
fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. The holder pays a non-refundable purchase price for the
Option, known as the "premium." The maximum amount of risk the purchaser of the
Option assumes is equal to the premium plus related transaction costs, although
this entire amount may be lost. The risk of the seller, or "writer", however, is
potentially unlimited, unless the Option is "covered." A call option written by
the Fund is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash, short-term money market
instruments or U.S. Government securities in a segregated account with its
custodian. A put option written by the Fund is "covered" if the Fund maintains
cash, short-term money market instruments or U.S. Government securities with a
value equal to the exercise price in a segregated account with its custodian, or
else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is (a) equal to or greater
than the exercise price of the put written or (b) is less than the exercise
price of the put written if the difference is maintained by the Fund in cash or
short-term money market instruments in a segregated account with its custodian.
Put and call options written by the Fund may also be covered in such other
manner as may be in accordance with the requirements of the exchange on which,
or the counter party with which the option is traded, and applicable laws and
regulations. If the writer's obligation is not so covered, it is subject to the
risk of the full change in value of the underlying security from the time the
option is written until exercise.
The Fund may write Options for the purpose of increasing its return and for
hedging purposes. In particular, if the Fund writes an Option which expires
unexercised or is closed out by the Fund at a profit, the Fund retains the
premium paid for the Option less related transaction costs, which increases its
gross income and offsets in part the reduced value of the portfolio security in
connection with which the Option is written, or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the Option moves adversely to the Fund's position, the Option may be
exercised and the Fund will then be required to purchase or sell the security at
a disadvantageous price, which might only partially be offset by the amount of
the premium.
The Fund may write Options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call Option against that
security. The exercise price of the call Option the Fund determines to write
depends upon the expected price movement of the underlying security. The
exercise price of a call Option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the Option is written.
The writing of covered put Options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put Options may be used by the
Fund in the same market environments in which call Options are used in
equivalent buy-and-write transactions.
The Fund may also write combinations of put and call Options on the same
security, a practice known as a "straddle". By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the Options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset,
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<PAGE> 35
however, in whole or in part, by the premiums received on the writing of the two
Options. Conversely, if the price of the security declines by a sufficient
amount, the put will likely be exercised. The writing of straddles will likely
be effective, therefore, only where the price of a security remains stable and
neither the call nor the put is exercised. In an instance where one of the
Options is exercised, the loss on the purchase or sale of the underlying
security may exceed the amount of the premiums received.
By writing a call Option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the Option. By writing a put Option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing of
Options will not be undertaken by the Fund solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where Options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call Options. Put Options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put Options will permit the Fund to sell the
securities underlying such Options at the exercise price, or to close out the
Options at a profit. The Fund will purchase call Options to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. If such an increase occurs, the call Option will permit the Fund to
purchase the securities underlying such Option at the exercise price or to close
out the Option at a profit. The premium paid for a call or put Option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise of the Option, and, unless the price of the underlying security rises
or declines sufficiently, the Option may expire worthless to the Fund. In
addition, in the event that the price of the security in connection with which
an Option was purchased moves in a direction favorable to the Fund, the benefits
realized by the Fund as a result of such favorable movement will be reduced by
the amount of the premium paid for the Option and related transaction costs.
The staff of the Securities and Exchange Commission (the "SEC") has taken the
position that purchased over-the-counter Options and assets used to cover
written over-the-counter Options are illiquid and, therefore, together with
other illiquid securities, cannot exceed 15% of the Fund's assets. Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter Options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter Options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Fund has in place with such
primary dealers will provide that the Fund has the absolute right to repurchase
an Option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Fund for writing the Option, plus the amount, if
any, of the Option's intrinsic value (i.e., the amount that the Option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the Option
if the Option is written out-of-the-money. The Fund will treat all or a portion
of the formula as illiquid for purposes of the 15% test imposed by the SEC
staff. The Fund may also write over-the-counter Options with non-primary
dealers, including foreign dealers, and will treat the assets used to cover
these Options as illiquid for purposes of such 15% test.
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
("Options on Stock Indices"). The Fund may cover call Options on Stock Indices
by owning securities whose price changes, in the opinion of the Adviser or a
Sub-Adviser, are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. Where the Fund covers a call option on a stock
index through ownership of securities, such securities may not match the
composition of the index and, in that event, the Fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. The Fund may also cover call options on stock indices by
holding a call on the same index and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian. The Fund may cover put
options on stock indices by maintaining cash or cash equivalents with a value
equal to the exercise price in a segregated account with its custodian, or else
by holding a put on the same security and in the same principal amount as the
put written where the exercise price of the put held (a) is equal to or greater
than the exercise price of the put written or (b) is less than the exercise
price of the put written if the difference is maintained by the Fund in cash or
cash equivalents in a segregated account with its custodian. Put and call
options on stock indices may also be covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty with
which, the option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option on a stock
index, 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
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<PAGE> 36
call option falls or remains the same, the Fund will realize a profit in the
form of the premium received (less transaction costs) that could offset all or a
portion of any decline in the value of the securities it owns. If the value of
the index rises, however, the Fund will realize a loss in its call option
position, which will reduce the benefit of any unrealized appreciation in the
Fund's stock investments. By writing a put option, the Fund assumes the risk of
a decline in the index. To the extent that the price changes of securities owned
by the Fund correlate with changes in the value of the index, writing covered
put options on indexes will increase the Fund's losses in the event of a market
decline, although such losses will be offset in part by the premium received for
writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
FUTURES CONTRACTS: The Fund may enter into stock index futures contracts
("Futures Contracts") in order to protect the Fund's current or intended stock
investments from broad fluctuations in stock prices and for non-hedging purposes
to the extent permitted by applicable law. For example, the Fund may sell
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 in 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 Futures Contracts in order to gain
rapid market exposure that may, in part or in whole, offset increases in the
cost of securities that the Fund intends to purchase. As such acquisitions are
made, the corresponding positions in Futures Contracts will be closed out. In a
substantial majority of these transactions, the Fund will purchase such
securities upon the 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: The Fund may write and purchase Options to buy or
sell Futures Contracts ("Options on Futures Contracts") for hedging purposes.
The Fund may also enter into transactions in Options on Futures Contracts for
non-hedging purposes to the extent permitted by applicable law. The purchase of
a call Option on a Futures Contract is similar in some respects to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the price of the Futures Contract upon which it is
based or the price of the underlying debt securities, it may or may not be less
risky than ownership of the Futures Contract or underlying securities. As with
the purchase of Futures Contracts, when the Fund is not fully invested it may
purchase a call Option on a Futures Contract to hedge against a market advance
due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the security underlying the Futures Contract. If the
futures price at expiration of the option is below the exercise price, the Fund
will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put Option on a Futures
Contract constitutes a partial hedge against increasing prices of the security
underlying the Futures Contract. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a partial
hedge against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing Options on Futures Contracts may to some extent be
reduced or increased by changes in the value of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, or a decline in the dollar value of
foreign currencies in which portfolio securities are denominated, the Fund may,
in lieu of selling Futures Contracts, purchase put options thereon. In the event
that such decrease in portfolio value occurs, it may be offset, in whole or
part, by a profit on the option. Conversely, where it is projected that the
value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or a rise in the dollar value of foreign
currencies in which securities to be acquired are denominated, the Fund may
purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts. As in the case of Options, the writing of Options
on Futures Contracts may require the Fund to forego all or a portion of the
benefits of favorable movements in the price of portfolio securities, and the
purchase of Options on Futures Contracts
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<PAGE> 37
may require the Fund to forego all or a portion of such benefits up to the
amount of the premium paid and related transaction costs.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased.
The Fund's ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments. It
is impossible to predict the amount of trading interest that may exist in
various types of options or futures. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. Furthermore, the Fund's ability to engage in options and
futures transactions may be limited by tax considerations.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or U.S.
Government securities in a segregated account with its custodian. The Fund may
cover the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of cash, short-term money
market instruments or U.S. Government securities in an amount equal to the value
of the security or index underlying the Futures Contract, or (c) through the
holding of a put on the same Futures Contract and in the same principal amount
as the put written where the exercise price of the put held is equal to or
greater than the exercise price of the put written, or is less than the exercise
price of the put written if the difference is maintained by the Fund in cash,
short-term money market instruments or U.S. Government securities in a
segregated account with its custodian. Put and call Options on Futures Contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
the Fund, the Fund will be required to sell the underlying Futures Contract
which, if the Fund has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by the Fund is exercised, the Fund will be
required to purchase the underlying Futures Contract which, if the Fund has
covered its obligation through the sale of such contract, will close out its
futures position. An Option on a Futures Contract is traded on the same contract
market as the underlying Futures Contact, subject to regulation by the CFTC and
the performance guarantee of the exchange clearing house. Options on Futures
Contracts, as noted in the Prospectus, are also traded on foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may also
enter into Forward Contracts for "cross-hedging" as noted in the Prospectus. The
Fund may enter into Forward Contracts for hedging purposes as well as for
non-hedging purposes. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of fixed income securities denominated in
a foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. By entering into such transactions, however, the
Fund may be required to forego the benefits of advantageous changes in exchange
rates. The Fund may also enter into transactions in Forward Contracts for other
than hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Fund may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Fund will realize profits which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority to
regulate Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would
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thereby offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options would be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options, which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for hedging purposes in a
manner similar to the way Forward Contracts will be utilized. For example, where
the Fund anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it may, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurred, the option would most likely not be exercised, and
the diminution in value of portfolio securities would be offset by the amount of
the premium received less related transaction costs.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, less transaction costs, and only if rates
move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of Options on Foreign Currencies, the Fund also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
All call and put options written on foreign currencies will be covered. A call
option written on foreign currencies by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash or cash equivalents
in a segregated account with its custodian. A put option written by the Fund is
"covered" if the Fund maintains cash or cash equivalents with a value equal to
the exercise price in a segregated account with its custodian, or else holds a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of the
put written if the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian. Call and put options on
foreign currencies may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counterparty
with which, the option is traded and applicable rules and regulations.
ADDITIONAL RISKS OF INVESTING IN OPTIONS ON SECURITIES, OPTIONS ON STOCK
INDICES, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES. Unlike transactions entered into by the Fund in
Futures Contracts, Options on Foreign Currencies and Forward Contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on securities and on
stock indices may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of Forward Contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
The Fund's ability effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, and Forward Contracts will
depend on the degree to which price movements in the underlying instruments
correlate with price movements in the relevant portion of the Fund's portfolio.
If the values of fixed income portfolio securities being hedged do not move in
the same amount or direction as the instruments underlying options, Futures
Contracts or Forward Contracts traded, the Fund's hedging strategy may not be
successful and the Fund could sustain losses on its hedging strategy which would
not be offset by gains on its portfolio. It is also possible that there may be a
negative correlation between the instrument underlying an Option, Futures
Contract or Forward Contract traded and the portfolio securities being hedged,
which could result in losses both on the hedging transaction and the portfolio
securities. In such instances, the Fund's overall return could be less than if
the hedging transaction had not been undertaken. In the case of futures and
Options on fixed income securities, the
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<PAGE> 39
portfolio securities which are being hedged may not be the same type of
obligation underlying such contract. As a result, the correlation probably will
not be exact. Consequently, the Fund bears the risk that the price of the fixed
income portfolio securities being hedged will not move in the same amount or
direction as the underlying index or obligation. Where the Fund enters into
Forward Contracts as a "cross hedge" (i.e., the purchase or sale of a Forward
Contract on one currency to hedge against risk of loss arising from changes in
value of a second currency), the Fund incurs the risk of imperfect correlation
between changes in the values of the two currencies, which could result in
losses.
The correlation between prices of securities and prices of Options, Futures
Contracts or Forward Contracts may be distorted due to differences in the nature
of the markets, such as differences in margin requirements, the liquidity of
such markets and the participation of speculators in the Option, Futures
Contract and Forward Contract markets. The trading of Options on Futures
Contracts also entails the risk that changes in the value of the underlying
Futures Contract will not be fully reflected in the value of the option. The
risk of imperfect correlation, however, generally tends to diminish as the
maturity or termination date of the Option, Futures Contract or Forward Contract
approaches.
The trading of Options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's or a Sub-Adviser's judgment as to the general
direction of exchange rates is incorrect, the Fund's overall performance may be
poorer than if it had not entered into any such contract.
It should be noted that the Fund may purchase and write Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes to the extent permitted by
applicable law for the purpose of increasing its return. As a result, the Fund
will incur the risk that losses on such transactions will not be offset by
corresponding increases in the value of portfolio securities or decreases in the
cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or expiration,
a position in an exchange-traded Option, Futures Contract, Option on a Futures
Contract or Option on a Foreign Currency can only be terminated by entering into
a closing purchase or sale transaction, which requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. If no such market exists, it may not be possible to close out a position,
and the Fund could be required to purchase or sell the underlying instrument or
meet ongoing variation margin requirements. The inability to close out option or
futures positions also could have an adverse effect on the Fund's ability
effectively to hedge its portfolio.
The liquidity of a secondary market in an Option or Futures Contract may be
adversely affected by "daily price fluctuation limits", established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which Options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded Options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of an
Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON U.S. EXCHANGES -- The available information on which the Fund
will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, and the markets for foreign securities as well as markets in
foreign countries may be operating during non-business hours in the U.S., events
could occur in such markets which would not be reflected until the following
day, thereby rendering it more difficult for the Fund to respond in a timely
manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or CFTC have jurisdiction
over the trading in the U.S. of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Fund to enter into
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<PAGE> 40
the trading strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
The Fund may also be required to receive delivery of the foreign currencies
underlying Options on Foreign Currencies or Forward Contracts it has entered
into. This could occur, for example, if an option written by the Fund is
exercised or the Fund is unable to close out a Forward Contract it has entered
into. In addition, the Fund may elect to take delivery of such currencies. Under
certain circumstances, such as where the Adviser or a Sub-Adviser believes that
the applicable exchange rate is unfavorable at the time the currencies are
received or the Adviser or a Sub-Adviser anticipates, for any other reason, that
the exchange rate will improve, the Fund may hold such currencies for an
indefinite period of time. While the holding of currencies will permit the Fund
to take advantage of favorable movements in the applicable exchange rate, such
strategy also exposes the Fund to risk of loss if exchange rates move in a
direction adverse to the Fund's position. Such losses could reduce any profits
or increase any losses sustained by the Fund from the sale or redemption of
securities and could reduce the dollar value of interest or dividend payments
received.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the Fund
will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
Options if, as a result, more than 5% of its total assets would be invested in
such Options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the use of such Futures Contract is
unleveraged.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES -- When the Fund commits to purchase
a security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC concerning
such purchases. Since that policy currently recommends that an amount of the
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, the Fund will always have cash, short-term
money market instruments or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, although the Fund does not
intend to make such purchases for speculative purposes and intends to adhere to
the provisions of the SEC policy, purchases of securities on such bases may
involve more risk than other types of purchases. For example, the Fund may have
to sell assets which have been set aside in order to meet redemptions. Also, if
the Fund determines it necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities to entities deemed creditworthy by the Adviser or a
Sub-Adviser. Such loans would be required to be secured continuously by
collateral in cash, cash equivalents or U.S. Government securities maintained on
a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would have the right to call a loan and obtain the
securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of the collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
would call the loan in anticipation of an important vote to be taken among
holders of the securities or of the giving or withholding of their consent on a
material matter affecting the investment. As with other extensions of credit
there are risks of delay in recovery or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the loans would
be made only to firms deemed by the Adviser to be of good standing, and when, in
the judgment of the Adviser or a Sub-Adviser, the consideration which could be
earned currently from securities loans of this type justifies the attendant
risk. If the Adviser or a Sub-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.
------------------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this Statement of Additional Information, means
the lesser of (i) more than 50% of the outstanding shares of the Trust or a
series or class, as applicable or (ii) 67% or more of the
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<PAGE> 41
outstanding shares of the Trust or a series or class, as applicable present at a
meeting at which holders of more than 50% of the outstanding shares of the Trust
or a series or class, as applicable are represented in person or by proxy):
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed, and then only as a temporary measure for extraordinary or emergency
purposes;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal in
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) in the ordinary course of its business. The Fund reserves
the freedom of action to hold and to sell real estate, mineral leases,
commodities or commodity contracts (including Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) acquired as a result of the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of option (including Options on Futures Contracts, Options, Options on Stock
Indices and Options on Foreign Currencies), Forward Contracts, Futures
Contracts, any other type of futures contract, and collateral arrangements
with respect to initial and variation margin are not deemed to be the issuance
of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue of
debt securities, the lending of portfolio securities, or the investment of the
Fund's assets in repurchase agreements, shall not be considered the making of
a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).
Except with respect to Investment Restriction (1), these investment restrictions
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of
unlisted securities, where no market exists), unless the Board of Trustees has
determined that such securities are liquid based on trading markets for the
specific security, if more than 15% of the Fund's assets (taken at market
value) would be invested in such securities. Repurchase agreements maturing in
more than seven days will be deemed to be illiquid for purposes of the Fund's
limitation on investment in illiquid securities;
(2) 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;
(3) invest for the purpose of exercising control or management;
(4) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act.
(5) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Fund,
or is an officer or a director of the investment adviser of the Fund, if one
or more of such persons also owns beneficially more than 0.5% of the
securities of such issuer, and such persons owning more than 0.5% of such
securities together own beneficially more than 5% of such securities;
(6) 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 any transaction and except that the Fund may make margin
deposits in connection with any type of option (including Options on Futures
Contracts, Options, Options on Stock Indices and Options on Foreign
Currencies), any type of futures contract (including Futures Contracts), and
Forward Contracts;
(7) sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund 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 the same conditions;
(8) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous operation or
relevant business experience;
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(9) pledge, mortgage or hypothecate in excess of 33 1/2% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of option, (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any type of
futures contract (including Futures Contracts), Forward Contracts and payments
of initial and variation margin in connection therewith, are not considered a
pledge of assets; or
(10) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities or (ii) put or call options or combinations thereof with
respect to securities, indexes of securities, Options on Foreign Currencies or
any type of futures contract (including Futures Contracts) or (b) the
purchase, ownership, holding or sale of contracts for the future delivery of
securities or currencies.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the investment management of the Fund's assets,
and the officers of the Trust are responsible for its operations. The Trustees
and officers are listed below, together with their principal occupations during
the past five years. (Their titles may have varied during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, Former Chairman
(until September 30, 1991)
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical School,
Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; Bank of NT Butterfield & Son
Limited, Chairman.
Address: 21 Reid Street, Hamilton, Bermuda HM 12
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc., President and Treasurer (Financial Consultants)
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President (since
January, 1990); The Kendall Company (health care products), Chairman and Chief
Executive Officer (prior to January 1990); Colgate-Palmolive Company, Senior
Executive Vice President (prior to January, 1990)
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman; (prior to June 1994) Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April 1992); Society
National Bank (commercial bank), Director (prior to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
JEFFREY L. SHAMES,* Vice President
Massachusetts Financial Services Company, President
JOHN D. LAUPHEIMER, JR.,* Vice President
Massachusetts Financial Services Company, Vice President
LESLIE J. NANBERG,* Vice President
Massachusetts Financial Services Company, Senior Vice President
JAMES T. SWANSON,* Vice President
Massachusetts Financial Services Company, Senior Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel (since September 1990); associated with major law firm (prior to
August 1990)
JAMES O. YOST,* Assistant Treasurer;
Massachusetts Financial Services Company, Vice President
- ---------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The 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 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee
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<PAGE> 43
may also retire prior to age 75 and receive reduced payments if he has completed
at least 5 years of service. Under the plan, a Trustee (or his beneficiaries)
will also receive benefits for a period of time in the event the Trustee is
disabled or dies. These benefits will also be based on the Trustee's average
annual compensation and length of service. There is no retirement plan provided
by the Trust for the interested Trustees, except Mr. Bailey. The Fund will
accrue its allocable portion of compensation expenses under the retirement plan
each year to cover current year's service and amortize past service cost.
As of November 30, 1994, the Trustees and officers, as a group, owned less than
1% of the Fund's shares outstanding not including 301,163 shares (which
represent approximately 1.37% of the outstanding shares of the Fund) owned of
record by certain employee benefit plans of MFS for which Mr. Brodkin is a
Trustee.
As of November 30, 1994, Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box
45286, Jacksonville, Florida, was the owner of 15.48% of the outstanding Class A
shares of the Fund. As of November 30, 1994, Merrill Lynch Pierce Fenner &
Smith, Inc., P.O. Box 45286, Jacksonville, Florida, was the owner of 20.49% of
the outstanding Class B shares of the Fund. As of November 30, 1994, Merrill
Lynch Pierce Fenner & Smith, Inc., P.O. Box 45286, Jacksonville, Florida, was
the owner of 42.76% of the outstanding Class C shares of the Fund.
The Declaration of Trust provides that it will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to liability to the Fund or its shareholders, it is determined that they engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices, or with respect to any matter, unless it is
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interest of the Trust. In the case of settlement,
such indemnification will not be provided unless it has been determined pursuant
to the Declaration of Trust, that they have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to an
Investment Advisory Agreement, dated August 30, 1993 (the "Advisory Agreement").
The Adviser provides the Fund with overall investment advisory and
administrative services, as well as general office facilities. Subject to such
policies as the Trustees may determine, the Adviser makes investment decisions
for the Fund. For these services and facilities, the Adviser receives an annual
management fee, computed and paid monthly, in an amount equal to 0.90% of the
average daily net assets of the Fund on an annualized basis.
For the period from commencement of operations on November 18, 1993 to October
31, 1994, the investment adviser, MFS, received $2,183,204, under its investment
advisory agreement with the Fund, of which $359,241 and $389,337 were paid to
its Sub-Advisers Oechsle and Batterymarch, respectively.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
The Trust pays the compensation of the Trustees who are not officers of the
Adviser (who currently receive a fee of $1,250 per year plus $225 per meeting
and committee meeting attended, together with such Trustee's out-of-pocket
expenses). The Fund pays all of its expenses (other than those assumed by the
Adviser or MFD, the Fund's distributor); including governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable to
the Fund; fees and expenses of independent accountants, of legal counsel, and of
any transfer agent, registrar or dividend disbursing agent of the Fund; expenses
of servicing shareholder accounts; expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements and reports
to governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio transactions including
currency conversion costs; 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 for such purposes 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 servicing its clients is discussed under the caption
"Portfolio Transactions and Brokerage Commissions".
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
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<PAGE> 44
The Advisory Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions")
and, in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Fund's shares (as defined in
"Investment Objective, Policies and Restrictions"), or by either party on not
more than 60 days' nor less than 30 days' written notice. The Advisory Agreement
provides that if MFS ceases to serve as the Adviser to the Fund, the Fund will
change its name so as to delete the initials "MFS" and that MFS may render
services to others and may permit other fund clients to use the initials "MFS"
in their names. The Advisory Agreement also provides that neither the Adviser
nor its personnel shall be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
execution and management of the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the Advisory
Agreement.
SUB-ADVISERS
OECHSLE: Oechsle serves as a Sub-Adviser to the Fund pursuant to a
Sub-Investment Advisory Agreement, dated August 30, 1993 between MFS and Oechsle
(the "Oechsle Sub-Advisory Agreement"). The Oechsle Sub-Advisory Agreement
provides that MFS may delegate to Oechsle the authority to make investment
decisions for the Fund. It is presently intended that Oechsle will provide
portfolio management services for the assets of the Fund to be invested in
Western Europe, Japan, Australia and New Zealand. For these services, the
Adviser pays Oechsle an annual fee computed and paid monthly in an amount equal
to 0.15% of the Fund's average daily net assets.
The Oechsle Sub-Advisory Agreement will remain in effect until August 1, 1995,
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by the vote of a majority
of the Fund's outstanding shares, and, in either case, by a majority of the
Trustees who are not parties to the Oechsle Sub-Advisory Agreement or interested
persons of any such party. The Oechsle Sub-Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by the
Trustees, by vote of a majority of the Fund's outstanding shares, by MFS or by
Oechsle on not less than 30 days' nor more than 60 days' written notice.
The Oechsle Sub-Advisory Agreement also specifically provides that neither the
Sub-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 Oechsle Sub-Advisory Agreement.
BATTERYMARCH: Batterymarch serves as a Sub-Adviser to the Fund pursuant to a
Sub-Investment Advisory Agreement, dated January 18, 1995 between MFS and
Batterymarch (the "Batterymarch Sub-Advisory Agreement"). The Batterymarch
Sub-Advisory Agreement provides that MFS may delegate to Batterymarch the
authority to make investment decisions for the Fund. It is presently intended
that Batterymarch will provide portfolio management services for the assets of
the Fund to be invested in emerging markets. For these services, the Adviser
pays Batterymarch an annual fee computed and paid monthly in an amount equal to
1.00% on an annualized basis of the average daily net asset value of the Fund
assets managed by Batterymarch.
The Batterymarch Sub-Advisory Agreement will remain in effect until August 1,
1996, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by the Board of Trustees or by the vote
of a majority of the Fund's outstanding shares, and, in either case, by a
majority of the Trustees who are not parties to the Sub-Advisory Agreement or
interested persons of any such party. The Batterymarch Sub-Advisory Agreement
terminates automatically if it is assigned and may be terminated without penalty
by the Trustees, by vote of a majority of the Fund's outstanding shares, by MFS
or by Batterymarch on not less than 30 days' nor more than 60 days' written
notice.
The Batterymarch Sub-Advisory Agreement also specifically provides that the
Sub-Adviser, shall not 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 duties or by reason of reckless
disregard of its obligations and duties under the Batterymarch Sub-Advisory
Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Trustees have reviewed and approved as in the best interests
of the Fund and the shareholders subcustodial arrangements with the Chase
Manhattan Bank, N.A. for securities of the Fund held outside the United States.
The Custodian also acts as the dividend disbursing agent of the Fund. The
Custodian has contracted with the Adviser for the
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<PAGE> 45
Adviser to perform certain accounting functions related to options transactions
for which the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement dated May 6, 1991 (the "Agency Agreement") with
the Trust. The Shareholder Servicing Agent's responsibilities under the Agency
Agreement include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and redemption of
each class of shares of the Fund. For these services, the Shareholder Servicing
Agent will receive a fee based on the net assets each class of shares of the
Fund computed and paid monthly. In addition, the Shareholder Servicing Agent
will be reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. For the period from commencement of
investment operations, November 18, 1993, to October 31, 1994, the Fund paid to
the Shareholder Servicing Agent fees of $468,121 under its Agency Agreement.
State Street Bank and Trust Company, the dividend and distribution disbursing
agent of the Fund, has contracted with the Shareholder Servicing Agent to
perform certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement with the
Trust dated as of January 1, 1995. 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 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 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" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" in this Statement of Additional Information).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 5.00% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of the Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described in
the Prospectus.
CLASS B SHARES AND CLASS C SHARES: MFD acts as agent in selling Class B and
Class C shares of the Fund to dealers. The public offering price of Class B and
Class C shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
For the period from commencement of operations on November 18, 1993 until
October 31, 1994, MFD received sales charges of $261,602 and dealers received
sales charges of $4,410,248 (as their concession on gross sales charges of
$4,671,850) for selling Class A shares of the Fund; the Fund received
$102,267,379 representing the aggregate net asset value of such shares.
For the period from commencement of operations on November 18, 1993 until
October 31, 1994, the CDSC imposed on redemptions of Class B shares was
approximately $320,000.
The Distribution Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Objective, Policies and
Restrictions --
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<PAGE> 46
Investment Restrictions") and in either case, by a majority of the Trustees who
are not parties to the Distribution Agreement or interested persons of any such
party. The Distribution Agreement terminates automatically if it is assigned and
may be terminated without penalty by either party on not more than 60 days' nor
less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser or a Sub-Adviser. Any such person may serve
other clients of the Adviser or a Sub-Adviser, or any subsidiary of the Adviser
or a Sub-Adviser in a similar capacity. Changes in the Fund's investments are
reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser or a Sub-Adviser has
complete freedom as to the markets in and broker-dealers through which it seeks
this result. In the U.S. and in some other countries debt securities are traded
principally in the over-the-counter market on a net basis through dealers acting
for their own account and not as brokers. In other countries both debt and
equity securities are traded on exchanges at fixed commission rates. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Adviser or a Sub-Adviser
normally seeks to deal directly with the primary market makers or on major
exchanges unless, in its opinion, better prices are available elsewhere. Subject
to the requirement of seeking execution at the best available price, securities
may, as authorized by the Advisory Agreement or either sub-advisory agreement,
be bought from or sold to dealers who have furnished statistical, research and
other information or services to the Adviser or a Sub-Adviser. At present no
arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
or a Sub-Adviser may consider sales of shares of the Fund and of the other
investment company clients of MFD as a factor in the selection of broker-dealers
to execute the Fund's portfolio transactions.
Under the Advisory Agreement or either sub-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 or a Sub-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 or a Sub-Adviser
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or their
respective overall responsibilities to the Fund or to their other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser or a Sub-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 or Sub-Adviser's other
clients in part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser or a Sub-Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Fund, a commission higher than one charged elsewhere will not be
paid to such a firm solely because it provided such Research. The Trustees
(together with the Trustees of the other MFS Funds) have directed the Adviser to
allocate a total of $20,000 of commission business from the MFS Funds to the
Pershing Division of Donaldson Lufkin & Jenrette as consideration for the annual
renewal of the Lipper Directors' Analytical Data Service (which provides
information useful to the Trustees in reviewing the relationship between the
Fund and the Adviser).
The Adviser's and Sub-Adviser's investment management personnel attempt to
evaluate the quality of Research provided by brokers. The Adviser or a
Sub-Adviser sometimes uses evaluations resulting from this effort as a
consideration in the selection of brokers to execute portfolio transactions.
The management fee of the Adviser or a Sub-Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research service. To the
extent the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed those
that might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and research, by an amount which cannot be presently
determined. Such services would be useful and of value to the Adviser or a
Sub-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 or a Sub-Adviser in carrying out its obligations to the
Fund. While such services are not expected to reduce the expenses of the Adviser
or a Sub-Adviser, the Adviser or a Sub-Adviser would, through use of the
services,
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<PAGE> 47
avoid the additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
For the period from commencement of investment operations on November 18, 1993
to October 31, 1994, total brokerage commissions of $575,263 were paid on total
transactions (other than U.S. Government securities, purchase options
transactions and short-term obligations) of $651,549,854.
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, any subsidiary of the Adviser or a Sub-Adviser. Investment decisions
for the Fund and for such other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients. Likewise, a particular security may be bought for one
or more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
to be equitable to each. It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security as far as the
Fund is concerned. In other cases, however, the Fund believes that its ability
to participate in volume transactions will produce better executions for the
Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser described
below) anticipates purchasing $50,000 or more of Class A shares of the Fund
alone or in combination with all classes of shares of other MFS Funds or MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period, in the case of purchases of $1 million or more), the
shareholder may obtain Class A shares of the Fund at the same reduced sales
charge as though the total quantity were invested in one lump sum by completing
the Letter of Intent section of the Account Application or filing a separate
Letter of Intent application (available from the Shareholder Servicing Agent)
within 90 days of the commencement of purchases. Subject to acceptance by MFD
and the conditions mentioned below, each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
in the Letter of Intent application. The shareholder or his dealer must inform
MFD that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. 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.
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<PAGE> 48
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 subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments, as
designated on the Account Application and based upon the value of his account.
Each payment under a Systematic Withdrawal Plan ("SWP") must be at least $100,
except certain limited circumstances. The aggregate withdrawals of Class B
shares in any year pursuant to a SWP generally are limited to 10% of the value
of the account at the time of establishment of the SWP. SWP payments are drawn
from the proceeds of share redemptions (which would be a return of principal
and, if reflecting a gain, would be taxable). Redemptions of Class B shares will
be made in the following order: (i) any "Reinvested Shares"; (ii) to the extent
necessary, any "Free Amount"; and (iii) to the extent necessary, the "Direct
Purchase" subject to the lowest CDSC (as such terms are defined in "Contingent
Deferred Sales Charge" in the Prospectus). The CDSC will be waived in the case
of redemptions of Class B shares pursuant to a SWP, but will not be waived in
the case of SWP redemptions of Class A shares which are subject to a CDSC. To
the extent that redemptions for such periodic withdrawals exceed dividend income
reinvested in the account, such redemptions will reduce and may eventually
exhaust the number of shares in the shareholder's account. All dividend and
capital gain distributions for an account with a SWP will be received in full
and fractional shares of the Fund at the net asset value in effect at the close
of business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $10,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and the imposition of a
CDSC on certain redemptions. The shareholder by written instruction to the
Shareholder Servicing Agent may deposit into the account additional shares of
the Fund, change the payee or change the dollar amount of each payment. The
Shareholder Servicing Agent may charge the account for services rendered and
expenses incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time by
mailing a check payable to the Fund directly to the Shareholder Servicing Agent.
The shareholder's account number and the name of his investment dealer must be
included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may participate in the Automatic Exchange Plan. The Automatic
Exchange Plan provides for automatic exchanges of funds from the shareholder's
account in an MFS Fund for investment in the same class of shares of other MFS
Funds selected by the shareholder (in the case of Class C shares for shares of
MFS Money Market Fund and if available for sale). Under the Automatic Exchange
Plan, transfers of at least $50 each may be made to up to four different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of
18
<PAGE> 49
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
Changes in amounts to be exchanged to each fund, the funds to which exchanges
are to be made and the timing of exchanges (monthly or quarterly), or
termination of a shareholder's participation in the Automatic Exchange Plan will
be made after instructions in writing or by telephone (an "Exchange Change
Request") are received by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as shares are registered;
if by telephone -- proper account identification is given by the dealer or
shareholder of record). Each Exchange Change Request (other than termination of
participation in the program) must involve at least $50. Generally, if an
Exchange Change Request is received by telephone or in writing before the close
of business on the last business day of a month, the Exchange Change Request
will be effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
holders of Class A shares of MFS Cash Reserve Fund in the case where shares of
such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six years of
the initial purchase in the case of Class B shares or 12 months of the initial
purchase in the case of certain Class A shares, a CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be considered
a "wash sale" and may result in the inability to recognize currently all or a
portion of a loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with the Fund for which payment
has been received by the Fund (i.e. an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale)
at net asset value. In addition, Class C shares may be exchanged for shares of
MFS Money Market Fund 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 MFS Fundamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by MFS Service Center, Inc.)
or all the shares in the account. Each exchange involves the redemption of the
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS Fund. Any
gain or loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by the Fund, and thus the purchase of shares of the other
MFS Fund, may be delayed for up to seven days if the Fund determines that such a
delay would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by MFD may also communicate a
shareholder's Exchange Request to MFD by facsimile subject to the requirements
set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
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 fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A Shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have
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<PAGE> 50
the right to exchange their shares for shares of the Fund, subject to the
conditions, if any, set forth in their respective prospectuses. In addition,
unitholders of the MFS Fixed Fund (a bank collective investment fund) have the
right to exchange their units (except units acquired through direct purchases)
for shares of the Fund, subject to the conditions, if any, imposed upon such
unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code Section 401(a) or 403(b) if the retirement
plan and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k)
Plan or another similar Section 401(a) or 403(b) recordkeeping program made
available by MFS Service Center, Inc.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition and holding period
of the Fund's portfolio assets. Because the Fund intends to distribute all of
its net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
although the Fund's foreign-source income may be subject to foreign withholding
taxes. If the Fund should fail to qualify as a "regulated investment company" in
any year, the Fund would incur a regular corporate federal income tax upon its
taxable income and Fund distributions would generally be taxable as ordinary
dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from income (including certain foreign currency
gains), and any distributions from net short-term capital gains (whether
received in cash or reinvested in additional shares) are taxable to shareholders
as ordinary income for federal income tax purposes. A portion of the Fund's
ordinary income dividends (but none of its capital gains) is eligible for the
dividends received deduction for corporations if the recipient otherwise
qualifies for that deduction with respect to its holding of Fund shares.
Availability of the deduction for particular corporate shareholders is subject
to certain limitations, and deducted amounts may be subject to the alternative
minimum tax or result in certain basis adjustments. Distributions of net capital
gains (i.e., the excess of the net long-term capital gains over the short-term
capital losses), whether received in cash or invested in additional shares, are
taxable to the Fund's shareholders as long-term capital gains for federal income
tax purposes regardless of how long they have owned shares in the Fund. Fund
dividends declared in October, November or December and paid the following
January will be taxable to shareholders as if received on December 31 of the
year in which they are declared.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any
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<PAGE> 51
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 redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within ninety days after their purchase followed by
any purchase (including purchases by exchange or by reinvestment) of the Fund or
of another MFS Fund (or any other shares of an MFS Fund generally sold subject
to a sales charge) without payment of an additional sales charge of Class A
shares.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year will be
marked to market (i.e., treated as if closed out) on such day, and any gain or
loss associated with the positions will be treated as 60% long-term and 40%
short term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts and
Forward Contracts to the extent necessary to meet the requirements of Subchapter
M of the Code.
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investments in zero coupon securities, deferred interest bonds, payment
in kind bonds, certain stripped securities, and certain securities purchased at
a market discount will cause it to realize income prior to the receipt of cash
payments with respect to those securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss to the Fund.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies for
non-hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. The
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that may entitle the Fund
to a reduced rate of tax or an exemption from tax on such income; the Fund
intends to qualify for treaty reduced rates where available. It is impossible to
determine the effective rate of foreign tax in advance since the amount of the
Fund's assets to be invested within various countries is not known. If the Fund
holds more than 50% of its assets in foreign securities at the close of its
taxable year, the Fund may elect to "pass through" to the Fund's shareholders
foreign income taxes paid. If the Fund so elects, shareholders will be required
to treat their pro-rata portion of the foreign income taxes paid by the Fund as
part of the amounts distributed to them by the Fund and thus includable in their
gross income for federal income tax purposes. Shareholders who itemize
deductions would then be allowed to claim a deduction or credit (but not both)
on their federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would be able (subject
to such limitations) to claim a credit but not a deduction.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower treaty rate may be permitted. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. The Fund is also required in certain circumstances to apply backup
withholding of 31% of taxable dividends and the redemption proceeds paid to any
shareholder who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding. Distributions received from the Fund by Non-U.S. Persons also
may be subject to tax under the laws of their own jurisdictions.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
7. DISTRIBUTION PLANS
CLASS A DISTRIBUTION PLAN: The Trustees have adopted a Distribution Plan
relating to Class A shares (the "Class A Distribution Plan") pursuant to Section
12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Rule") after having
concluded that there is a reasonable likelihood that the Class A Distribution
Plan would benefit the Fund and its Class A shareholders. The Class A
Distribution Plan is designed to promote sales, thereby
21
<PAGE> 52
increasing the net assets of the Fund. Such an increase may reduce the expense
ratio to the extent the Fund's fixed costs are spread over a larger net asset
base. Also, an increase in net assets may lessen the adverse effects that could
result were the Fund required to liquidate portfolio securities to meet
redemptions.
The Class A Distribution Plan provides that the Fund will pay MFD up to (but not
necessarily all of) an aggregate of 0.35% of the average daily net assets
attributable to the Class A shares annually in order that MFD may pay expenses
on behalf of the Fund related to the distribution and servicing of its Class A
shares. The expenses to be paid by MFD on behalf of the Fund include a service
fee to securities dealers which enter into a sales agreement with MFD of up to
0.25% of the portion of the Fund's average daily net assets attributable to the
Class A shares owned by investors for whom that securities dealer is the holder
or dealer of record. These payments are partial consideration for personal
services and/or account maintenance performed by such dealers with respect to
Class A shares. MFD may from time to time reduce the amount of the service fee
paid for shares sold prior to a certain date. Service fees may be reduced for a
securities dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. No service fee will be paid (i) to any securities dealer
who is the holder or dealer of record for investors who own 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 if the dealer satisfies certain criteria),
or (ii) to any insurance company which has entered into an agreement with the
Fund and MFD that permits such insurance company to purchase shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from time
to time be required to meet certain other criteria in order to receive service
fees. MFD or its affiliates are entitled to retain all service fees payable
under the Class A Distribution Plan for which there is no dealer of record or
for which qualification standards have not been met as partial consideration for
personal services and/or account maintenance services performed by MFD or its
affiliates for shareholder accounts.
MFD will also retain a distribution fee of 0.10% of the Fund's average daily net
assets attributable to Class A shares as partial consideration for services
performed and expenses incurred in the performance of MFD's obligations as to
Class A shares under the distribution agreement with the Fund. MFD is currently
waiving this 0.10% distribution fee. This waiver may be rescinded at any time by
MFD without notice to shareholders. Any remaining funds may be used to pay for
other distribution related expenses as described in the Prospectus. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as commissions and
service fees to dealers.
During the period from commencement of investment operations to October 31,
1994, the Fund incurred expenses of $308,306 (equal to 0.35% of its average
daily net assets) relating to the distribution and servicing of its Class A
shares, of which MFD waived $88,439 and securities dealers of the Fund and
certain banks and other financial institutions received $219,867, of which MFD
retained $28,128.
CLASS B DISTRIBUTION PLAN: The Trustees of the Fund have adopted a Distribution
Plan relating to Class B shares (the "Class B Distribution Plan") pursuant to
Section 12(b) of the 1940 Act and the Rule, after having concluded that there
was a reasonable likelihood that the Class B Distribution Plan would benefit
that Fund and the Class B shareholders of the Fund. The Class B Distribution
Plan is designed to promote sales, thereby increasing the net assets of the
Fund. Such an increase may reduce the expense ratio to the extent the Fund's
fixed costs are spread over a larger net asset base. Also, an increase in net
assets may lessen the adverse effects that could result were the Fund required
to liquidate portfolio securities to meet redemptions. There is, however, no
assurance that the net assets of the Fund will increase or that the other
benefits referred to above will be realized.
The Class B Distribution Plan provides that the Fund shall pay MFD, as the
Fund's distributor for its Class B shares, a daily distribution fee payable
monthly and equal on an annual basis to 0.75% of the Fund's average daily net
assets and will pay MFD a service fee up to 0.25% of the Fund's average daily
net assets attributable to Class B shares (which MFD will in turn pay to
securities dealers which enter into a sales agreement with MFD at a rate of up
to 0.25% of the Fund's average daily net assets attributable to Class B shares
owned by investors for whom that securities dealer is the holder or dealer of
record). This service fee is intended to be additional consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to Class B shares. MFD will advance to dealers the first-year
service fee at a rate equal to 0.25% of the amount invested. As compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible for
additional service fees with respect to such shares commencing in the thirteenth
month following purchase. Except in the case of the first year service fee, no
service fee will be paid to any securities dealer who is the holder or dealer of
record for investors who own Class B shares having an aggregate net asset value
of less than $750,000 or such other amount as may be determined from time to
time by MFD. MFD, however, may waive this minimum amount requirement from time
to time if the dealer satisfies certain criteria. Dealers may from time to time
be required to meet certain other criteria in order to receive service fees. MFD
or its affiliates are entitled to retain all service fees payable under the
Class B Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
The purpose of distribution payments to MFD under the Class B Distribution Plan
is to compensate MFD for its distribution
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<PAGE> 53
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. The Class B Distribution Plan also provides that MFD will receive all
CDSCs attributable to Class B shares (see "Distribution Plan" and "Purchases" in
the Prospectus).
During the period from the commencement of investment operations to October 31,
1994, the Fund incurred expenses of $1,489,320 (equal to 1.00% of its average
daily net assets attributable to Class B shares) relating to the distribution
and servicing of its Class B shares, of which MFD retained $7,658.
CLASS C DISTRIBUTION PLAN: The Distribution Plan relating to Class C shares (the
"Class C Distribution Plan") provides that the Fund will pay MFD a distribution
fee of up to 0.75% per annum of the Fund's average daily net assets attributable
to Class C shares and will pay MFD a service fee of up to 0.25% per annum of the
Fund's average daily net assets attributable to Class C shares (which MFD will
in turn pay to securities dealers which enter into a sales agreement with MFD at
a rate of up to 0.25% per annum of the Fund's daily net assets attributable to
Class C shares owned by investors for whom that securities dealer is the holder
or dealer of record).
The distribution/service fees attributable to Class C shares are designed to
permit an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares.
The service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class C shares. MFD or its affiliates are entitled to retain all service fees
payable under the Class C Distribution Plan with respect to accounts for which
there is no dealer of record as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates for
shareholder accounts.
The purpose of the distribution payments to MFD under the Class C Distribution
Plan is to compensate MFD for its distribution services to the Fund.
Distribution payments under the Plan will be used by MFD to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
or dealer of record.) MFD also pays 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 compensation of personnel and all costs of travel,
office expense and equipment. Since MFD's compensation is not directly tied to
its expenses, the amount of compensation received by MFD during any year may be
more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares. During
the period from January 3, 1994 (commencement of offering of Class C shares) to
October 31, 1994, the Fund incurred expenses of $57,000 (equal to 1.00% of its
average daily net assets attributable to Class C shares) relating to the
distribution and servicing of its Class C shares, of which MFD retained $2,090.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1995, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this Statement of Additional
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<PAGE> 54
Information, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once each day as
of the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding. Equity securities in the Fund's portfolio are valued at the last
sale price on the exchange on which they are primarily traded or on the NASDAQ
system for unlisted national market issues, or at the last quoted bid price for
listed securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system. Bonds and other fixed income
securities (other than short-term obligations) of U.S. issuers in the Fund's
portfolio are valued on the basis of valuations furnished by a pricing service
which utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Forward Contracts will be valued
using a pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board of
Trustees. All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal market is
one or more securities or commodities exchanges (whether domestic or foreign)
will be valued at the last reported sale price or at the settlement price prior
to the determination (or if there has been no current sale, at the closing bid
price) on the primary exchange on which such securities, futures contracts or
options are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available, be
valued at current bid prices, unless such securities are reported on the NASDAQ
system, in which case they are valued at the last sale price or, if no sales
occurred during the day, at the last quoted bid price. Short-term obligations in
the Fund's portfolio are valued at amortized cost, which constitutes fair value
as determined by the Board of Trustees. Short-term obligations with a remaining
maturity in excess of 60 days will be valued upon dealer supplied valuations.
Portfolio investments for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD prior to the
close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (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 (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 aggregate total rate of return
for Class A shares for the period from November 18, 1993 (commencement of
offering this class of shares) to October 31, 1994 was 9.61% (including the
effect of the sales charge) and 16.33% (without the effect of the sales charge.)
The aggregate total rate of return for Class B shares for the period from
November 18, 1993 (commencement of offering this class of shares) to October 31,
1994 was 11.47% (including the effect of the CDSC) and 15.47% (without the
effect of the CDSC.) The Fund's aggregate total rate of return for Class C
shares, from January 3, 1994 (commencement of offering of Class C shares) to
October 31, 1994 was 8.10%. Certain total rate of return figures would have been
lower if a fee waiver had not been in place.
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
24
<PAGE> 55
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is
established as the first mutual fund in
America.
-- 1924 -- Massachusetts Investors Trust is the
first mutual fund to make full public
disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research
departments is established to provide
in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the
first mutual fund to register under the
Securities Act of 1933.
-- 1936 -- Massachusetts Investors Trust is the
first mutual fund to let shareholders 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 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 Regatta becomes America's first
non-qualified market-value-adjusted
fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the
first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first
global emerging markets fund to offer the
expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R)
Union Standard Trust, the first trust to
invest solely in companies deemed to be
union-friendly by an Advisory Board of senior
labor officials, senior managers of companies
with significant labor contracts, academics
and other national labor leaders.
9. DESCRIPTION OF SHARES, VOTING RIGHTS
AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and one 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 of each series of the Trust (Class A, Class B and Class
C shares). Each share of a class of the Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. Upon liquidation of
the Fund, shareholders of each class of the Fund are entitled to share pro rata
in the Fund's net assets allocable to such class available for distribution to
shareholders. The Trust reserves the right to create and issue a number of
series and additional classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Trust. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Trust. No material amendment may be made to the Declaration of
Trust without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Restrictions"). The Trust or any series of the
Trust may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if
25
<PAGE> 56
approved by the vote of the holders of two-thirds of the Trust's or the affected
series' outstanding shares voting as a single class, or of the affected series
of the Trust, except that if the Trustees recommend such merger, consolidation
or sale, the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon liquidation
and distribution of the assets of the Fund, if approved by the vote of the
holders of two-thirds of its outstanding shares of the Trust, or (iii) by the
Trustees by written notice to its shareholders. If not so terminated, the Trust
will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and agents of
the Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent certified public accountants.
The Fund's audited Financial Statements, consisting of the Portfolio of
Investments at October 31, 1994, the Statement of Assets and Liabilities at
October 31, 1994, the Statement of Operations for the period ended October 31,
1994, the Statement of Changes in Net Assets for the period ended October 31,
1994, the Financial Highlights table for the period from November 18, 1993 (for
Class A and Class B shares) and January 3, 1994 (for Class C shares) to October
31, 1994, and the Notes to Financial Statements and the Independent Auditors'
Report, each of which is included in the Annual Report to Shareholders of the
Fund and are incorporated by reference into this Statement of Additional
Information and have been so incorporated in reliance upon the report of
Deloitte & Touche LLP, independent certified public accountants, as experts in
accounting and auditing. A copy of the Annual Report accompanies this Statement
of Additional Information.
26
<PAGE> 57
APPENDIX A
DESCRIPTION OF BOND RATINGS
MOODY'S
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than 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. Some 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.
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.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S & P
AAA: Debt rated AAA has the highest rating assigned by S & P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic
27
<PAGE> 58
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB - rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B - rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC - debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated
'F-1 +'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protect. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be lowered, FitchAlert is relatively short-term, and should be resolved within
12 months.
28
<PAGE> 59
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
WORLD GROWTH
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
MWF-13-3/95/500 9/209/309
<PAGE> 60
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - October 31, 1994
Common Stocks - 83.1%
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign - 55.9%
Argentina - 1.0%
Banco Frances del Rio Plata (Finance)<F1> 75,700 $ 643,707
Buenos Aires Embotelladora, ADR (Beverages) 10,800 414,450
CAPEX S.A. (Utilities - Electric)<F1> 48,000 465,786
Mirgor Sacifia (Automotive)<F2><F1> 33,000 297,000
Telecom Argentina S.A., ADR
(Telecommunications)<F2><F1> 12,130 739,930
YPF Sociedad Anonima (Oils) 56,000 1,351,000
------------
$ 3,911,873
- ----------------------------------------------------------------------------------------------------------------------
Australia - 1.2%
Australia & New Zealand Bank Group Ltd. (Finance)<F1> 419,000 $ 1,212,870
News Corp. Ltd. (Media)<F1> 87,400 538,425
Western Mining Corp. Holdings, ADS (Metals) 440,200 2,741,244
------------
$ 4,492,539
- ----------------------------------------------------------------------------------------------------------------------
Austria - 0.1%
Fotex (Retail) 112,200 $ 386,094
- ----------------------------------------------------------------------------------------------------------------------
Belize - 0.1%
Belize Holdings, Inc. (Finance) 26,000 $ 464,750
- ----------------------------------------------------------------------------------------------------------------------
Brazil - 2.6%
Aracruz Celulose S.A., ADR (Forest and Paper Products)<F1> 33,750 $ 430,312
Banco Bradesco (Finance) 72,800,000 681,408
Brasmotor S.A. (Furniture - Home Appliances)<F1> 1,790,000 742,297
CESP, ADR (Utilities - Electric)<F2><F1> 38,500 610,995
Cementos Paz del Rio S.A., GDR (Building
Materials)<F2><F1> 26,000 637,000
Cia Cervejaria Brahma (Beverages)<F1> 2,200,000 774,169
Cia Vale do Rio Doce (Iron and Steel)<F1> 4,930,000 1,068,942
Petrol Brasileiros (Oils) 4,610,000 710,069
Sadia Concordia S.A. (Food Processing) 428,000 651,635
Telecom Brasileiras S.A., ADR (Telecommunications)<F1> 45,290 2,309,790
Usinas Siderurgicas, ADR (Iron and
Steel)<F2><F1> 72,300 1,183,551
------------
$ 9,800,168
- ----------------------------------------------------------------------------------------------------------------------
Canada - 2.2%
Crownx, Inc. (Insurance)<F1> 150,000 $ 984,288
Echo Bay Mines Ltd. (Mining) 194,200 2,378,950
MacMillan Bloedel Ltd. (Forest and Paper Products) 51,000 694,875
Placer Dome, Inc. (Mining) 86,400 1,868,400
Rogers Communications, Inc. (Telecommunications)<F1> 160,000 2,349,701
------------
$ 8,276,214
- ----------------------------------------------------------------------------------------------------------------------
Chile - 0.8%
Compania de Telefonos de Chile S.A., ADR (Telecommunications) 6,500 $ 611,812
Empresas Telex-Chile S.A., ADR (Entertainment)<F1> 13,200 242,550
Enersis S.A., ADR (Utilities - Electric) 24,500 719,688
Maderas Y Sinteticos S.A. (Forest and Paper Products) 22,100 618,800
Quimica Y Minera Chile S.A., ADR (Chemicals) 3,900 132,112
Vina Concha Y Toro S.A., ADR (Beverages)<F1> 43,800 782,925
------------
$ 3,107,887
- ----------------------------------------------------------------------------------------------------------------------
China - 1.1%
Beiren Printing Machinery Holdings Ltd. (Machinery)<F1> 949,000 $ 432,955
China Southern Glass, "B" (Glass)<F1> 309,800 360,862
Dong Fang Electric (Utilities - Electric)<F1> 304,000 167,217
Guangzhou Shipyard International Co. Ltd. (Transportation)<F1> 274,000 141,849
Lizhu Pharmaceuticals Group, "B" (Pharmaceuticals)<F1> 269,000 149,705
Maanshan Iron & Steel Co. (Iron and Steel)<F1> 2,210,000 700,769
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Foreign - continued
China - continued
Shandong Huaneng Power Co. Ltd., ADR
(Utilities - Electric)<F1> 10,900 $ 117,175
Shanghai Dazhong Taxi Co., "B" (Transportation)<F1> 214,000 239,680
Shanghai Diesel Engineering, "B" (Chemicals)<F1> 209,000 223,630
Shanghai Erfangji Co. Ltd., "B" (Textile Machinery)<F1> 341,000 119,350
Shanghai Petrochemical (Oils)<F1> 350,000 121,174
Shanghai Sanmao Textile Co., "B" (Textiles)<F1> 276,300 110,520
Shanghai Yaohua Pilkington Glass Co. Ltd., "B"
(Building Materials)<F1> 42,500 53,125
Shenzhen China Bicycles (Bicycles)<F1> 552,500 418,317
Shenzhen Konka Electronics Group Ltd. (Electronics)<F1> 196,000 164,887
Shenzhen Yili Mineral Water, "B" (Beverages)<F1> 220,000 85,420
Tsingtao Brewery (Beverages)<F1> 474,000 355,814
Yizheng Chemical Fibre Co. Ltd. (Chemicals) 516,000 205,358
------------
$ 4,167,807
- ----------------------------------------------------------------------------------------------------------------------
Colombia - 0.2%
Cementos Diamante S.A. (Building
Materials)+ 19,800 $ 475,200
Corp. Financiera del Valle S.A., ADR
(Finance)<F2><F1> 14,900 312,900
------------
$ 788,100
- ----------------------------------------------------------------------------------------------------------------------
Finland - 0.4%
Nokia AB (Electronics) 5,900 $ 888,365
Nokia Corp., ADR (Electronics) 10,000 751,250
------------
$ 1,639,615
- ----------------------------------------------------------------------------------------------------------------------
France - 2.8%
Canal Plus (Media)<F1> 4,428 $ 730,685
Compagnie Bancaire S.A. (Finance) 28,318 2,763,000
Elf Aquitaine (Oil and Gas) 25,466 1,883,346
Michelin (C.G.D.E.), "B" (Tire and Rubber)<F1> 47,947 2,008,276
Peugeot S.A. (Automotive) 12,919 1,935,967
Rhone-Poulenc S.A. (Chemicals) 56,925 1,405,146
------------
$ 10,726,420
- ----------------------------------------------------------------------------------------------------------------------
Germany - 2.8%
Daimler-Benz AG (Automotive)<F1> 5,651 $ 2,905,949
Kaufhof Holdings AG (Consumer Goods)<F1> 2,269 769,818
Mannesmann AG (Telecommunications)<F1> 15,721 4,204,259
Schering AG (Pharmaceuticals)<F1> 915 611,441
Volkswagen AG (Automotive)<F1> 7,709 2,264,185
------------
$ 10,755,652
- ----------------------------------------------------------------------------------------------------------------------
Ghana - 0.1%
Ashanti Goldfields Co. Ltd., GDR
(Mining)+<F1> 13,000 $ 276,250
- ----------------------------------------------------------------------------------------------------------------------
Greece - 0.4%
Alpha Credit Bank (Finance) 10,680 $ 455,572
Ergo Bank (Finance)<F1> 3,440 126,307
European Technical (Construction)<F1> 20,170 240,907
Hellenic Bottling Co. S.A. (Beverages)<F1> 7,300 226,726
Sarantopoulos (Construction)<F1> 12,500 208,963
Titan Cement Co. (Building Materials)<F1> 3,630 115,564
------------
$ 1,374,039
- ----------------------------------------------------------------------------------------------------------------------
Hong Kong - 2.2%
Champion Technology Holdings (Telecommunications) 256,000 $ 82,832
Cheung Kong Holdings Ltd. (Real Estate) 274,000 1,319,200
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Foreign - continued
Hong Kong - continued
China Light & Power (Utilities - Electric)<F1> 32,500 $ 169,093
China Travel International Investment Hong Kong Ltd.
(Transportation)<F1> 856,000 249,271
Citic Pacific Ltd. (Diversified Holding Cos.)<F1> 317,800 956,300
Consolidated Electric Power Asia Ltd. (Utilities - Electric)<F1> 64,000 149,511
Guoco Group Ltd. (Finance) 46,000 217,304
HSBC Holdings PLC (Finance)<F1> 52,000 615,803
Hong Kong Telecommunications (Telecommunications)<F1> 343,200 735,127
Hutchison Whampoa (Real Estate) 344,000 1,589,439
IMC Holdings (Transportation)<F1> 740,000 275,351
International Maritime (Transportation) 183,000 146,845
Jardine Matheson Holdings Ltd. (Conglomerate) 5,600 46,567
New World Development Co. (Real Estate)<F1> 114,000 363,696
Stone Electric Technologies (Electronics)<F1> 1,476,000 303,739
Swire Pacific Ltd. (Transportation)<F1> 7,000 53,452
Varitronix International Ltd. (LCD Manufacturing) 204,000 302,310
Wah Kwong Shipping Holdings Ltd. (Transportation) 73,000 154,947
Wharf Holdings Ltd. (Real Estate)<F1> 180,000 710,542
------------
$ 8,441,329
- ----------------------------------------------------------------------------------------------------------------------
India - 1.4%
Bajaj Auto Ltd. (Automotive)+ 25,000 $ 604,807
Hindalco Industries Ltd., GDR (Conglomerate)<F1> 13,300 448,875
ITC Ltd., GDR (Conglomerate)<F1> 16,200 178,200
India Gateway Fund Ltd. (Finance)<F1> 80,000 848,000
India Magnum Fund NV (Finance)<F1> 16,700 1,002,000
Indian Tobacco Co. Ltd., GDR
(Tobacco)<F2><F1> 32,200 354,200
JCT Ltd. (Textiles) 21,200 461,100
JK Corp. Ltd., GDR (Construction)<F1> 55,000 412,500
Reliance Industries Ltd., GDS (Consumer Goods and Services)<F1> 15,000 382,500
South Indian Viscose (Apparel and
Textiles)<F2><F1> 19,600 431,200
------------
$ 5,123,382
- ----------------------------------------------------------------------------------------------------------------------
Indonesia - 0.8%
Astra International (Pharmaceuticals)<F1> 204,800 $ 452,857
Bank International Indonesia (Finance) 45,000 132,673
Bank International Indonesia (Finance) 25,000 84,648
Hanjaya Mandala Sampoerna (Tobacco)<F1> 28,000 135,437
Indah Kiat Pulp & Paper Corp. (Forest and Paper Products)<F1> 259,000 307,232
Kalbe Farma (Pharmaceuticals)<F1> 61,200 270,653
Matahari Putra Prima (Retail) 47,000 99,597
PT Indonesia Satel, ADR (Telecommunications)<F1> 20,100 788,925
PT Inti Indorayon Utama (Forest and Paper Products)<F1> 75,000 203,847
PT Inti Indorayon Utama S.A., ADR (Forest and
Paper Products)<F2><F1> 19,000 154,923
Roda Vivatex (Textiles)<F1> 255,000 563,860
------------
$ 3,194,652
- ----------------------------------------------------------------------------------------------------------------------
Italy - 2.2%
Fiat S.P.A. (Automotive)<F1> 899,600 $ 3,675,659
Luxottica Group S.P.A., ADR (Consumer Products) 27,700 927,950
Pirelli S.P.A. (Tire and Rubber)<F1> 846,100 1,255,112
Telecom Italia (Telecommunications) 967,800 2,657,199
------------
$ 8,515,920
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Foreign - continued
Japan - 14.8%
DDI Corp. (Telecommunications) 430 $ 3,900,207
Daiei, Inc. (Retail - Grocery)<F1> 180,000 2,696,281
Daiwa Securities Co. Ltd. (Finance)<F1> 227,000 3,306,508
Ito-Yokado Co. Ltd. (Retail - Grocery)<F1> 23,000 1,256,921
Kawasaki Heavy Industries (Aerospace - Defense)<F1> 144,000 708,099
Komori Corp. (Printing Machinery)<F1> 69,000 1,846,178
Kyocera Corp. (Electronics)<F1> 35,000 2,668,388
Matsuzakaya Co. Ltd. (Retail)<F1> 55,000 784,091
NEC Corp. (Electronics - Semiconductors) 290,000 3,714,876
New Oji Paper Co. Ltd. (Forest and Paper Products)<F1> 230,000 2,566,116
Nichido Fire & Marine Ltd. (Insurance)<F1> 229,000 2,008,481
Nikon Corp. (Jewelry - Watches and Gemstones)<F1> 164,000 1,673,884
Nippon Steel Corp. (Steel)<F1> 688,000 2,842,975
Nippon Telephone & Telegraph Co. (Telecommunications)<F1> 228 2,131,612
Nissan Motor Co. Ltd. (Automotive)<F1> 405,000 3,460,072
Obayashi Corp. (Engineering and Construction)<F1> 135,000 965,083
Okabe Co. Ltd. (Building Materials)<F1> 23,000 204,339
Okamura Corp. (Engineering and Construction)<F1> 163,000 1,335,320
Pioneer Electronics Corp. (Electronics)<F1> 81,000 2,117,045
Sankyo Co. Ltd. (Pharmaceuticals)<F1> 2,000 52,066
Sasebo Heavy Industries (Aerospace - Defense)<F1> 214,000 884,297
Sharp Corp. (Electronics)<F1> 348,000 6,507,025
Sony Corp. (Electronics)<F1> 57,600 3,516,694
Sumitomo Bank (Finance)<F1> 60,000 1,128,099
Sumitomo Realty & Development (Real Estate)<F1> 322,000 2,062,396
Tokyo Ohka Kogyo Ltd. (Chemicals)<F1> 56,900 2,016,188
------------
$ 56,353,241
- ----------------------------------------------------------------------------------------------------------------------
Malaysia - 1.8%
Aokam Perdana Berhad (Forest and Paper Products)<F1> 49,000 $ 404,737
Berjaya Sports Toto Berhad (Conglomerate)<F1> 230,000 358,348
Land & General Berhad (Forest and Paper Products) 150,000 186,000
Magnum Corp. Berhad (Entertainment) 8,000 18,007
Malayan Banking Berhad (Finance)<F1> 82,000 558,553
Renong Berhad (Conglomerate)<F1> 165,000 258,368
Resorts World Berhad (Entertainment)<F1> 270,000 1,712,272
Sungei Way Holdings Berhad (Real Estate)<F1> 71,000 280,720
Technology Resources Berhad (Conglomerate)<F1> 426,000 1,659,307
Telekom Malaysia (Telecommunications)<F1> 70,000 567,234
United Engineers Ltd. (Engineering and Construction)<F1> 101,000 545,625
Westmont Berhad (Conglomerate) 53,000 375,533
------------
$ 6,924,704
- ----------------------------------------------------------------------------------------------------------------------
Mexico - 2.7%
Cemex S.A., "A" (Building Materials)<F1> 133,506 $ 1,194,445
Cifra S.A. de C.V. (Retail) 450,300 1,213,203
Compania Siderurgica Guadala, ADR (Conglomerate)<F1> 23,400 830,700
Corporacion GEO S.A. de C.V. (Homebuilders)<F1> 22,000 599,500
Empresas ICA S.A., ADR (Construction) 19,700 583,612
Grupo Carso (Conglomerate)<F1> 82,300 875,201
Grupo Financiaro Banamex, "C" (Finance)<F1> 147,200 1,010,742
Grupo Sidek S.A. de C.V., ADR (Holding Cos.)<F1> 28,000 493,500
Grupo Televisa (Telecommunications)<F1> 33,800 747,396
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Foreign - continued
Mexico - continued
Pan American Beverage (Beverages)<F1> 18,000 $ 621,000
Telefonos de Mexico (Telecommunications) 568,000 1,583,194
Telefonos de Mexico S.A., ADR (Telecommunications)<F1> 5,800 319,000
------------
$ 10,071,493
- ----------------------------------------------------------------------------------------------------------------------
Netherlands - 1.1%
Frans Maas Group (Transportation) 20,000 $ 636,277
Philips Electronics N.V. (Electronics)<F1> 41,220 1,365,192
Wolters Kluwer (Publishing)<F1> 27,960 2,022,984
------------
$ 4,024,453
- ----------------------------------------------------------------------------------------------------------------------
New Zealand - 0.9%
Carter Holt Harvey Ltd. (Forest and Paper Products)<F1> 628,800 $ 1,524,598
Fletcher Challenge Ltd., ADS (Forest and Paper Products)<F1> 63,975 84,644
Fletcher Challenge Ltd., ADS (Forest and Paper Products)<F1> 613,900 1,654,696
------------
$ 3,263,938
- ----------------------------------------------------------------------------------------------------------------------
Pakistan - 0.6%
Cherat Cement Co. (Building Materials)<F1> 66,000 $ 258,659
Dewan Salman Fibre (Apparel and Textiles)<F1> 45,000 249,842
Fauji Fertilizer (Chemicals)<F1> 101,600 328,498
HUB Power Ltd. (Utilities -
Electric)+<F1> 23,000 258,750
ICI Pakistan (Chemicals)<F1> 54,000 453,242
Pakistan Synthetic (Chemicals)<F1> 36,000 81,595
Pakistan Telecommunications (Telecommunications)<F1> 125,000 195,954
Pakistan Telecommunications (Telecommunications)<F1> 1,200 200,853
Prime Commercial Bank Ltd. (Finance)<F1> 126,900 168,885
Sui Northern Gas (Oil and Gas)<F1> 130,000 187,871
------------
$ 2,384,149
- ----------------------------------------------------------------------------------------------------------------------
Peru - 0.4%
Banco de Credito (Finance)<F1> 145,498 $ 345,427
Cementos Lima (Building Materials)<F1> 924 377,033
Cervecer Backus & Johnston (Beverages)<F1> 156,705 386,126
Peruana Telefonos, "B" (Utilities - Telephone)<F1> 332,167 461,509
------------
$ 1,570,095
- ----------------------------------------------------------------------------------------------------------------------
Philippines - 1.0%
Aboitiz Equity Ventures, Inc. (Finance)<F1> 6,700,000 $ 1,538,059
Ayala Corp., "B" (Diversified Holding Cos.)<F1> 116,000 205,558
Benpres Holdings Corp. (Miscellaneous)<F1> 35,200 404,800
JG Summit Holdings, "B" (Miscellaneous)<F1> 523,000 210,632
Manila Electronics Co. (Electronics)<F1> 22,635 319,060
Metropolitan Bank & Trust Co. (Finance) 6,216 184,002
Petron Corp. (Oil Services)<F1> 117,000 120,157
Philippine Long Distance Telephone (Telecommunications)<F1> 6,185 352,545
Philippine National Bank (Finance)<F1> 9,913 155,702
SM Prime Holdings, Inc. (Real Estate)<F1> 572,000 195,811
------------
$ 3,686,326
- ----------------------------------------------------------------------------------------------------------------------
Poland
Electrim (Electronics)<F1> 1,500 $ 56,340
- ----------------------------------------------------------------------------------------------------------------------
Portugal - 0.4%
Banco Comercial Portuguese (Finance)<F1> 22,650 $ 309,668
Cimentos de Portugal S.A. (Building Materials)<F1> 20,100 376,875
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Foreign - continued
Portugal - continued
Corticeira Amorim S.A. (Manufacturing) 18,800 $ 347,849
Sonae Industria Investimentos (Services) 14,500 339,561
------------
$ 1,373,953
- ----------------------------------------------------------------------------------------------------------------------
Singapore - 0.5%
Fraser & Neave Ltd. (Beverages)<F1> 85,000 $ 1,007,493
Keppel Corp. (Transportation)<F1> 114,000 1,048,365
------------
$ 2,055,858
- ----------------------------------------------------------------------------------------------------------------------
South Africa - 0.1%
Southern Africa Minerals (Metals and Minerals)<F1> 238,200 $ 366,326
- ----------------------------------------------------------------------------------------------------------------------
South Korea - 0.5%
Cho Hung Bank (Finance)<F1> 19,638 $ 327,711
Hyundai Motor Co. Ltd. (Automotive) 3,300 73,425
Korea Asia Fund (Finance)<F1> 5 62,500
Korea Electric Power Corp. (Utilities - Electric)<F1> 8,020 304,901
Korea Electric Power Corp., ADR (Utilities - Electric) 5,000 118,750
Pohang Iron & Steel Co. Ltd. (Iron and Steel)<F1> 3,200 105,200
Samsung Electronics Co., GDS (Electronics)<F1> 14,400 864,000
------------
$ 1,856,487
- ----------------------------------------------------------------------------------------------------------------------
Spain - 1.1%
Banco de Santander S.A. (Finance) 38,620 $ 1,571,978
Iberdrola S.A. (Utilities - Electric)<F1> 168,740 1,113,239
San Miguel Corp., ADR (Food and Beverage Products) 6,000 318,000
Telefonica de Espana (Utilities - Telephone)<F1> 100,450 1,361,557
------------
$ 4,364,774
- ----------------------------------------------------------------------------------------------------------------------
Sri Lanka - 0.3%
Ceylon Grain Elevators (Agriculture)<F1> 20,000 $ 69,473
DFCC Sri Lanka (Finance)<F1> 42,800 485,370
National Development Bank (Finance)<F1> 36,500 328,157
Puttalam Cement Co. (Building Materials)<F1> 950,000 291,172
------------
$ 1,174,172
- ----------------------------------------------------------------------------------------------------------------------
Sweden - 2.8%
Astra AB, Free Shares, "A" (Pharmaceuticals)<F1> 115,490 $ 3,131,446
Astra AB, Free Shares, "B" (Pharmaceuticals)<F1> 13,420 359,199
Autoliv (Automotive)<F1> 60,000 2,124,545
Rottneros Bruks AB (Building Materials)<F1> 537,200 771,355
SKF Aktiebolaget, Free Shares, "B" (Metal Fabricate - Hardware)<F1> 79,790 1,457,138
Skandinaviska Enskilda Banken, "A" (Finance)<F1> 384,100 2,516,652
TV 4 AB (Telecommunications)<F1> 10,000 255,113
------------
$ 10,615,448
- ----------------------------------------------------------------------------------------------------------------------
Taiwan - 0.1%
Tung Ho Steel Enterprise Corp. (Metal Fabricate -
Hardware)<F2><F1> 27,077 $ 365,540
- ----------------------------------------------------------------------------------------------------------------------
Thailand - 0.9%
Bangkok Bank Ltd. (Finance)<F1> 82,900 $ 898,447
Electricity Generating Power Co. Ltd. (Utilities -
Electric)<F2><F3><F1> 180,000 160,543
Phatra Thanakit Co. (Finance)<F1> 59,500 611,408
Precious Shipping Ltd. (Transportation) 12,900 165,697
Serm Suk Co. Ltd. (Beverages)<F1> 5,500 66,230
Shinawatra Computer Co. Ltd. (Computers)<F1> 3,200 99,675
Siam Cement Co. (Building Materials)<F1> 8,000 461,767
Thailand Farmers Bank Co. (Finance) 9,200 81,243
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
Foreign - continued
Thailand - continued
Thailand Plastic & Chemical Co. Ltd. (Chemicals)<F1> 34,100 $ 438,004
TPI Polene Co. Ltd. (Plastics)<F1> 33,250 280,275
------------
$ 3,263,289
- ----------------------------------------------------------------------------------------------------------------------
Turkey - 0.5%
Akbank T.A.S. (Finance)<F1> 508,100 $ 145,171
Akbank T.A.S. (Finance)<F1> 304,860 26,131
Arcelik A.S. (Furniture - Home Appliances) 1,372,106 382,468
Cimentas Fabrikasi (Building Materials)<F1> 179,000 117,254
Ege Biracilik Ve Malt Sanayii A.S. (Beverages) 673,200 478,511
Migros Turk (Consumer Products)<F1> 195,000 440,279
Tofas-Turk Otomobil Fabrikas (Automotive)<F1> 426,800 321,215
------------
$ 1,911,029
- ----------------------------------------------------------------------------------------------------------------------
United Kingdom - 2.9%
ASDA Group PLC (Retail - Grocery) 2,965,500 $ 2,960,159
BPB Industries (Building Materials)<F1> 289,000 1,418,753
Huntingdon International Holdings PLC, ADR
(Consumer Products)<F1> 101,800 483,550
Pilkington PLC (Building Materials)<F1> 652,200 2,054,467
Sears PLC (Retail)<F1> 854,900 1,496,179
Smith (W.H.) Group PLC (Retail) 90,300 687,113
Takare PLC (Medical and Health Technology and
Services)+ <F1> 100,000 370,643
Vodafone Group PLC (Telecommunications)<F1> 481,600 1,668,774
------------
$ 11,139,638
- ----------------------------------------------------------------------------------------------------------------------
Venezuela - 0.1%
Corimon C.A., ADR (Building Materials)<F1> 23,500 $ 235,000
Mavesa S.A., ADS (Food and Beverage
Products)+ <F1> 50,866 279,763
------------
$ 514,763
- ----------------------------------------------------------------------------------------------------------------------
Total Foreign (Identified Cost, $194,940,313) $212,778,707
- ----------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated - 27.2%
Apparel and Textiles - 0.1%
Team Rent Group, Inc.<F1> 43,300 $ 497,950
- ----------------------------------------------------------------------------------------------------------------------
Automotive - 1.4%
APS Holdings Corp.<F1> 110,000 $ 3,245,000
Capco Automotive Products<F1> 5,000 61,875
Harvard Industries<F1> 112,000 2,016,000
------------
$ 5,322,875
- ----------------------------------------------------------------------------------------------------------------------
Business Machines - 0.2%
Affiliated Computer Co.<F1> 27,300 $ 593,775
Mattson Technology Industries, Inc.<F1> 2,800 58,800
------------
$ 652,575
- ----------------------------------------------------------------------------------------------------------------------
Business Services - 1.5%
Accustaff, Inc.<F1> 9,900 $ 137,363
Ceridian Corp.<F1> 100,000 2,600,000
Computer Sciences Corp.<F1> 35,000 1,627,500
Interim Services, Inc.<F1> 45,200 1,118,700
Norrell Corp. 12,400 241,800
------------
$ 5,725,363
- ----------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated - continued
Cellular Telephones - 2.4%
AirTouch Communications<F1> 50,000 $ 1,493,750
Cellular Communications of Puerto Rico<F1> 100,000 3,625,000
LIN Broadcasting Corp.<F1> 30,000 4,140,000
------------
$ 9,258,750
- ----------------------------------------------------------------------------------------------------------------------
Computer Software - Personal Computers - 3.2%
Autodesk, Inc. 138,000 $ 4,761,000
Broderbund Software, Inc.<F1> 44,000 2,816,000
Electronic Arts, Inc.<F1> 48,600 1,093,500
Microsoft Corp.<F1> 45,000 2,835,000
Softdesk, Inc.<F1> 40,000 795,000
------------
$ 12,300,500
- ----------------------------------------------------------------------------------------------------------------------
Computer Software - Systems - 4.0%
Aspen Technology, Inc.<F1> 4,900 $ 83,300
Cadence Design Systems, Inc.<F1> 150,000 3,000,000
Compuware Corp.<F1> 76,900 3,008,713
Epic Design Technology, Inc.<F1> 1,900 42,038
Informix Corp.<F1> 50,000 1,375,000
Keane, Inc.<F1> 21,900 448,950
Oracle Systems Corp.<F1> 105,000 4,830,000
PRI Automation, Inc.<F1> 2,200 33,550
Sybase, Inc.<F1> 30,000 1,571,250
System Software Associates, Inc. 50,000 621,875
------------
$ 15,014,676
- ----------------------------------------------------------------------------------------------------------------------
Construction Services - 0.4%
Shaw Group, Inc.<F1> 110,000 $ 1,347,500
- ----------------------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.6%
Callaway Golf Co. 15,000 $ 573,750
Department 56, Inc.<F1> 27,100 992,538
O'Sullivan Industries Holdings<F1> 47,200 595,900
------------
$ 2,162,188
- ----------------------------------------------------------------------------------------------------------------------
Electronics - 1.5%
Cyrix Corp.<F1> 15,000 $ 622,500
LSI Logic Corp.<F1> 95,000 4,037,500
S3, Inc.<F1> 80,000 1,135,000
------------
$ 5,795,000
- ----------------------------------------------------------------------------------------------------------------------
Entertainment - 0.9%
Bally Gaming International, Inc.<F1> 80,000 $ 910,000
Casino America, Inc.<F1> 37,700 405,275
Heritage Media Corp.<F1> 10,000 242,500
Hollywood Park, Inc. 45,000 596,250
Promus Cos., Inc.<F1> 20,000 592,500
Showboat, Inc. 30,000 360,000
VariFlex, Inc.<F1> 10,000 205,000
------------
$ 3,311,525
- ----------------------------------------------------------------------------------------------------------------------
Machinery - 0.4%
DT Industries, Inc. 15,400 $ 200,200
Flair Corp.<F1> 40,000 700,000
SI Handling Systems, Inc. 55,000 467,500
------------
$ 1,367,700
- ----------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated - continued
Medical and Health Products - 0.7%
Immunex Corp.<F1> 26,000 $ 351,000
Noven Pharmaceutical<F1> 40,000 610,000
U.S. Healthcare, Inc. 25,000 1,181,250
Ventritex, Inc.<F1> 25,000 650,000
------------
$ 2,792,250
- ----------------------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 3.8%
Advantage Health Corp.<F1> 75,000 $ 2,156,250
Community Health Systems, Inc.<F1> 36,800 966,000
Genesis Health Ventures, Inc.<F1> 41,000 1,209,500
Health Management Assn., Inc.<F1> 45,000 1,170,000
Healthwise of America, Inc.<F1> 77,500 2,712,500
Integrated Health Services, Inc.<F1> 30,000 1,222,500
Living Centers of America 10,100 304,262
Mariner Health Group, Inc.<F1> 41,400 936,675
Mid-Atlantic Medical Services, Inc.<F1> 10,000 231,250
Pacificare Health Systems, Inc.<F1> 5,000 365,000
Renal Treatment Centers, Inc.<F1> 50,000 962,500
Sierra Health Services, Inc.<F1> 3,200 104,000
Surgical Care Affiliates, Inc. 24,600 482,775
United Healthcare Corp. 30,000 1,582,500
------------
$ 14,405,712
- ----------------------------------------------------------------------------------------------------------------------
Precious Metals and Minerals - 0.2%
Santa Fe Pacific Corp. 50,000 $ 768,750
- ----------------------------------------------------------------------------------------------------------------------
Oils - 0.2%
Newfield Exploration Co.<F1> 32,500 $ 784,062
- ----------------------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 1.3%
Hometown Buffet, Inc.<F1> 50,900 $ 585,350
Hospitality Franchise Systems<F1> 85,000 2,316,250
ShoLodge, Inc.<F1> 80,000 1,800,000
Taco Cabana, Inc.<F1> 25,000 200,000
------------
$ 4,901,600
- ----------------------------------------------------------------------------------------------------------------------
Stores - 2.2%
Baby Superstores, Inc.<F1> 1,900 $ 86,925
Corporate Express, Inc.<F1> 9,300 209,250
Dollar General Corp. 55,000 1,595,000
General Nutrition Cos., Inc.<F1> 22,500 573,750
Hollywood Entertainment Corp.<F1> 21,100 675,200
Intelligent Electronics, Inc. 70,000 1,085,000
Micro Warehouse, Inc.<F1> 25,000 881,250
Movie Gallery, Inc.<F1> 56,000 1,456,000
Office Depot, Inc.<F1> 50,000 1,237,500
Sports Club, Inc.<F1> 30,500 259,250
Welcome Home, Inc.<F1> 24,300 230,850
------------
$ 8,289,975
- ----------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
- ----------------------------------------------------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated - continued
Telecommunications - 2.1%
Cablevision Systems Corp.<F1> 25,000 $ 1,484,375
Colonial Data Technology<F1> 50,000 462,500
IDB Communications Group<F1> 237,500 2,196,875
MFS Communications, Inc.<F1> 25,000 925,000
Ortel Corp.<F1> 2,900 79,025
Paging Network, Inc.<F1> 40,000 1,350,000
Rogers Cantel Mobile Communications<F1> 50,000 1,528,125
Tessco Technologies, Inc.<F1> 1,600 31,400
------------
$ 8,057,300
- ----------------------------------------------------------------------------------------------------------------------
Trucking - 0.1%
Celadon Group, Inc.<F1> 25,700 $ 475,450
Covenant Transportation, Inc.<F1> 2,400 45,600
------------
$ 521,050
- ----------------------------------------------------------------------------------------------------------------------
Total U.S. Dollar Denominated (Identified Cost, $94,141,873) $103,277,301
- ----------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $289,082,186) $316,056,008
- ----------------------------------------------------------------------------------------------------------------------
Convertible Bonds - 0.4%
- ----------------------------------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- ----------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated - 0.4%
Aokam Perdana Berhad, 3.5s, 2004 $ 100 $ 108,000
Argosy Gaming Corp., 12s, 2001 200 221,000
Essar Gujarat Ltd., 5.5s, 1998 310 616,900
Land & General Berhad, 4.5s, 2004 350 434,000
------------
$ 1,379,900
- ----------------------------------------------------------------------------------------------------------------------
Non-U.S. Dollar Denominated
Michelin, 2.5s, 2001 FRF 2,522 $ 120,340
- ----------------------------------------------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $1,376,605) $ 1,500,240
- ----------------------------------------------------------------------------------------------------------------------
Short-Term Obligations - 15.6%
- ----------------------------------------------------------------------------------------------------------------------
Coca-Cola Co., due 11/21/94 $ 4,000 $ 3,989,267
Federal Home Loan Bank, due 11/10/94 6,000 5,993,070
Federal Home Loan Mortgage Corp., due 11/01/94 - 12/05/94 16,835 16,817,068
Federal National Mortgage Assn., due 11/01/94 - 11/30/94 16,610 16,576,365
Motorola, Inc., due 11/22/94 2,390 2,383,238
Pfizer, Inc., due 11/21/94 5,465 5,450,335
Toys 'R' Us, due 11/21/94 7,990 7,968,517
- ----------------------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 59,177,860
- ----------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $349,636,651) $376,734,108
Other Assets, Less Liabilities - 0.9% 3,611,184
- ----------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $380,345,292
- ----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Non-income producing security.
<F2> Restricted security - SEC Rule 144A.
<F3> Security valued by or at the direction of the Trustees.
FRF=French Francs
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------------------
October 31, 1994
- ------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $349,636,651) $376,734,108
Foreign currency, at value (identified cost, $32,472) 35,434
Receivable for investments sold 13,958,459
Receivable for Fund shares sold 6,176,107
Interest and dividends receivable 301,646
Deferred organization expenses 27,729
Other assets 41,938
------------
Total assets $397,275,421
------------
Liabilities:
Cash overdraft $ 2,896,887
Payable for investments purchased 11,948,963
Payable for Fund shares reacquired 1,321,496
Net payable for forward foreign currency exchange contracts
sold 394,273
Net payable for forward foreign currency exchange contracts 18,378
Payable to affiliates -
Management fee 27,756
Shareholder servicing agent fee 5,974
Distribution fee 91,090
Accrued expenses and other liabilities 225,312
------------
Total liabilities $ 16,930,129
------------
Net assets $380,345,292
------------
Net assets consist of:
Paid-in capital $350,467,813
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 26,654,577
Accumulated undistributed net realized gain on investments and
foreign currency transactions 3,013,096
Accumulated undistributed net investment income 209,806
------------
Total $380,345,292
------------
Shares of beneficial interest outstanding 21,905,856
------------
Class A shares:
Net asset value and redemption price per share
(net assets of $131,502,652 / 7,535,626 shares of beneficial
interest outstanding) $17.45
------
Offering price per share (100/94.25) $18.51
------
Class B shares:
Net asset value, redemption price and offering price per share
(net assets of $236,970,846 / 13,685,392 shares of beneficial
interest outstanding) $17.32
------
Class C shares:
Net asset value, redemption price and offering price per share
(net assets of $11,871,794 / 684,838 shares of beneficial
interest outstanding) $17.34
------
</TABLE>
On sales of $50,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
and Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Operations
- ------------------------------------------------------------------------------------------
Year Ended October 31, 1994<F1>
- ------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Dividends $ 2,112,643
Interest 1,616,299
Foreign taxes withheld (218,050)
-----------
Total investment income $ 3,510,892
-----------
Expenses -
Management fee $ 2,183,204
Trustees' compensation 20,079
Shareholder servicing agent fee (Class A) 131,920
Shareholder servicing agent fee (Class B) 327,651
Shareholder servicing agent fee (Class C) 8,550
Distribution and service fee (Class A) 308,306
Distribution and service fee (Class B) 1,489,320
Distribution and service fee (Class C) 57,000
Custodian fee 180,636
Auditing fees 82,582
Printing 36,022
Postage 21,512
Legal fees 15,821
Amortization of organization expenses 6,075
Miscellaneous 318,975
-----------
Total expenses $ 5,187,653
Reduction of expenses by distributor (88,439)
-----------
Net expenses $ 5,099,214
-----------
Net investment loss $(1,588,322)
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 3,325,182
Foreign currency transactions 1,486,042
-----------
Net realized gain on investments $ 4,811,224
-----------
Change in unrealized appreciation (depreciation) -
Investments $27,097,457
Foreign currency and forward foreign currency exchange
contracts (442,880)
-----------
Net unrealized gain on investments $26,654,577
-----------
Net realized and unrealized gain on investments and
foreign currency $31,465,801
-----------
Increase in net assets from operations $29,877,479
-----------
<FN>
<F1> For the period from the commencement of investment operations, November 18,
1993 to October 31, 1994.
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------
<S> <C>
Year Ended October 31, 1994++
- --------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment loss $ (1,588,322)
Net realized gain on investments and foreign
currency transactions 4,811,224
Net unrealized gain on investments and foreign
currency 26,654,577
------------
Increase in net assets from operations $ 29,877,479
------------
Fund share (principal) transactions -
Net proceeds from sale of shares $442,273,385
Cost of shares reacquired (91,805,572)
------------
Increase in net assets from Fund share
transactions $350,467,813
------------
Total increase in net assets $380,345,292
Net assets:
At beginning of period --
------------
At end of period (including accumulated
undistributed net investment income of $209,806) $380,345,292
------------
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------------------------------------------------
Year Ended October 31, 1994<F1>
- ----------------------------------------------------------------------------------------------------------
Class A Class B Class C+
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $15.00 $15.00 $16.04
------ ------ ------
Income from investment operations -
Net investment loss<F6><F7> $(0.02) $(0.15) (0.13)
Net realized and unrealized gain on investments 2.47 2.47 1.43
------ ------ ------
Total from investment operations $ 2.45 $ 2.32 $ 1.30
------ ------ ------
$17.45 $17.32 $17.34
------ ------ ------
Total return<F5> 16.33%<F3> 15.47%<F3> 8.10%<F3>
Ratios (to average net assets)/Supplemental data<F7>:
Expenses<F1> 1.57% 2.39% 2.31%
Net investment loss<F1> (0.14)% (0.95)% (0.83)%
Portfolio turnover 1.00% 100% 100%
Net assets at end of period (000 omitted) $131,503 $236,971 $11,872
<FN>
<F1> For the period from the commencement of investment operations, November 18, 1993 to October 31,
1994.
<F2> Annualized.
<F3> Not annualized.
<F4> For the period from the commencemen t of offering of Class C shares,
January 3, 1994 to October 31, 1994.
<F5> Total return for Class A shares does not include the applicable sales
charge. If the sales charge had been included, the result would have been
lower.
<F6> Net investment loss per share is based on average shares outstanding.
<F7> The distributor did not impose a portion of its distribution fee on Class A
shares amounting to $0.016 per share for the period. If this fee had been
incurred by the Fund, the ratio of expenses to average net assets and net
investment income to average net assets (on an annualized basis) would have
been 1.67% and (0.24)%, respectively.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Growth Fund (the Fund), which commenced operations on November 18,
1993, is a non-diversified series of MFS Series Trust VIII (the Trust). The
Trust is organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates value. Non-U.S. dollar denominated short- term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the- counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of
operations of the Fund.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
Futures Contracts - The Fund may enter into stock-index futures contracts for
the delayed purchase of a notional quantity of indexed securities at a fixed
price on a future date. In entering such contracts, the Fund is required to
deposit either in cash or securities an amount equal to a certain percentage of
the contract amount. Subsequent payments are made or received by the Fund each
day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in stock-index futures contracts is
designed to hedge against anticipated future changes in exchange rates or
securities prices. The Fund may also invest in stock-index futures contracts for
non-hedging purposes. Should exchange rates or securities prices move
unexpectedly, the Fund may not achieve the anticipated benefits of the
stock-index futures contracts and may realize a loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At October 31, 1994, the Fund had no securities on loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex- dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the period ended October 31, 1994, $1,798,128 was reclassified
from accumulated net realized gain on investments and foreign currency
transactions to accumulated undistributed net investment income due to
differences between book and tax accounting for passive foreign investment
companies, short-term capital gains and currency transactions. This change had
no effect on the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees.
Shareholders of each class also bear certain expenses that pertain only to that
particular class. All shareholders bear the common expenses of the Fund pro rata
based on the average daily net assets of each class, without distinction between
share classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses, including distribution
and shareholder service fees.
(3) Transactions with Affiliates Investment Adviser - The Fund has an investment
advisory agreement with Massachusetts Financial Services Company (MFS) to
provide overall investment advisory and administrative services, and general
office facilities. The management fee, computed daily and paid monthly at an
annual rate of 0.90% of average daily net assets, amounted to $2,183,204. The
advisory agreement permits the adviser to engage one or more sub-advisers and
the adviser has engaged Oechsle International Advisors, L.P., a Delaware Limited
Partnership, and Batterymarch Financial Management, a Massachusetts business
trust, to assist in the performance of its services.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Financial Services, Inc. (FSI)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all of its independent Trustees. Included in Trustees' compensation is
a net periodic pension expense of $3,895 for the period ended October 31, 1994.
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$261,602 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A, Class B
and Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to FSI of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares
to be used for commissions to dealers and payments to FSI wholesalers for sales
at or above a certain dollar level, and other such distribution-related expenses
that are approved by the Fund. FSI is waiving the 0.10% distribution fee
(amounting to $88,439 for the period ended October 31, 1994) for an indefinite
period. Fees incurred under the distribution plan during the period ended
October 31, 1994 were 0.35% of average daily net assets attributable to Class A
shares on an annualized basis and amounted to $308,306 (of which FSI retained
$28,128).
The Class B and Class C Distribution Plans provide that the Fund will pay FSI a
monthly distribution fee, equal to 0.75% per annum, and a quarterly service fee
of up to 0.25% per annum, of the Fund's average daily net assets attributable to
Class B and Class C shares. FSI will pay to securities dealers that enter into a
sales agreement with FSI all or a portion of the service fee attributable to
Class B and Class C shares, and to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. Fees incurred under the distribution plans during
1994 were 1.00% of average daily net assets attributable to both Class B and
Class C shares on an annualized basis and amounted to $1,489,320 and $57,000,
respectively (of which FSI retained $7,658 and $2,090 for Class B and Class C
shares, respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge is imposed on shareholder redemptions of Class B shares in the
event of a share redemption within six years of purchase. FSI receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the period ended October 31, 1994 were $208 and $320,082 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$131,920, $327,651 and $8,550 for Class A, Class B and Class C shares,
respectively, for its services as shareholder servicing agent. The fee is
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$448,238,769 and $203,311,085, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
- ------------------------------------------------------------------------------
Aggregate cost $350,508,501
------------
Gross unrealized appreciation $ 36,557,320
Gross unrealized depreciation 10,331,713
------------
Net unrealized appreciation $ 26,225,607
------------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A<F1> Class B<F1>
------------------------------ ------------------------------
Year Ended October 31, 1994 Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 9,816,517 $157,514,885 16,702,222 $269,173,872
Shares reacquired (2,280,891) (37,853,320) (3,016,830) (49,857,102)
--------- ------------ ---------- ------------
Net increase 7,535,626 $119,661,565 13,685,392 $219,316,770
--------- ------------ ---------- ------------
<CAPTION>
Class C<F2>
-----------------------------
Year Ended October 31, 1994 Shares Amount
- ---------------------------------------------------------------------
<S> <C> <C>
Shares sold 931,213 $ 15,584,628
Shares reacquired (246,375) (4,095,150)
-------- ------------
Net increase 684,838 $ 11,489,478
-------- ------------
<FN>
<F1> For the period from the commencement of offering of Class A and Class B
shares, November 18, 1993 to October 31, 1994.
<F2> For the period from the commencement of offering of Class C shares, January
3, 1994 to October 31, 1994.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
period ended October 31, 1994 was $4,283.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency exchange
contracts and futures contracts. The notional or contractual amounts of these
instruments represent the investment the Fund has in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
A summary of obligations under these financial instruments at October 31, 1994,
is as follows:
Forward Foreign Currency Exchange Contracts
Contracts In Contracts Net Unrealized
Settlement Date to Deliver Exchange for at Value Depreciation
- --------------------------------------------------------------------------------
Sales 12/20/94 DEM 10,379,000 $ 6,675,027 $ 6,907,183 $(232,156)
12/20/94 FRF 20,700,000 3,894,271 4,022,900 (128,629)
12/20/94 JPY 404,655,000 4,164,403 4,197,891 (33,488)
----------- ----------- ----------
$14,733,701 $15,127,974 $(394,273)
----------- ----------- ----------
DEM = Deutsche Mark
FRF = French Francs
JPY = Japanese Yen
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $18,378 at October 31, 1994.
At October 31, 1994, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At October 31,1994, the
Fund owned the following restricted securities (constituting 2.10% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees. These securities may be offered and sold to
"qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of
Description Acquisition Shares Cost Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ashanti Goldfields Co., Ltd., GDR 4/20/94 13,000 $260,000 $ 276,250
Bajaj Auto Ltd. 10/31/94 25,000 633,250 604,807
CESP, ADR 2/17/94 - 9/28/94 38,500 612,548 610,995
Cementos Diamante S.A. 5/17/94 19,800 303,732 475,200
Cementos Paz del Rio S.A., GDR 9/21/94 26,000 546,000 637,000
Corp. Financiera del Valle S.A.,
ADR 11/23/93 - 6/10/94 14,900 311,350 312,900
Electricity Generating Power Co.,
Ltd. 10/27/94 180,000 160,820 160,543
HUB Power Ltd. 10/05/94 23,000 248,975 258,750
Indian Tobacco Co., Ltd., GDR 11/19/93 - 10/12/94 32,200 349,750 354,200
JCT Ltd. 7/29/94 21,200 359,552 461,100
Mavesa S.A., ADS 11/22/93 - 3/24/94 50,866 389,087 279,763
Mirgor Sacifia 10/20/94 33,000 297,000 297,000
PT Inti Indorayon Utama S.A., ADR 11/24/93 - 10/20/94 19,000 125,813 154,923
South Indian Viscose 7/28/94 19,600 376,360 431,200
Takare PLC 12/22/93 - 12/24/93 100,000 389,455 370,643
Telecom Argentina S.A., ADR 11/19/93 - 5/03/94 12,130 641,150 739,930
Tung Ho Steel Enterprise Corp. 9/09/94 - 10/19/94 27,077 461,601 365,540
Usinas Siderurgicas, ADR 9/20/94 72,300 960,144 1,183,551
----------
$7,974,295
----------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust VIII and Shareholders of MFS World Growth
Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS World Growth Fund as of October
31, 1994, and the related statements of operations and changes in net assets,
and financial highlights for the period from November 18, 1993 (commencement of
operations) to October 31, 1994. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned at October 31, 1994 by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS World Growth
Fund at October 31, 1994, the results of its operations, the changes in its net
assets, and its financial highlights for the period from November 18, 1993
(commencement of operations) to October 31, 1994 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 5, 1994
--------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE> 61
PROSPECTUS
March 1, 1995
MFS(R) STRATEGIC Class A Shares of Beneficial Interest
INCOME FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- --------------------------------------------------------------------------------
Page
1. Expense Summary ....................................................... 2
2. The Fund .............................................................. 3
3. Condensed Financial Information ....................................... 3
4. Investment Objective and Policies ..................................... 5
5. Management of the Fund ................................................ 16
6. Information Concerning Shares of the Fund ............................. 17
Purchases ........................................................... 17
Exchanges ........................................................... 23
Redemptions and Repurchases ......................................... 23
Distribution Plans .................................................. 26
Distributions ....................................................... 28
Tax Status .......................................................... 28
Net Asset Value ..................................................... 28
Description of Shares, Voting Rights and Liabilities ................ 29
Performance Information ............................................. 29
7. Shareholder Services .................................................. 30
Appendices ............................................................ 32
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS STRATEGIC INCOME FUND 500 Boylston St., Boston, MA 02116 (617) 954-5000
The investment objective of MFS Strategic Income Fund (the "Fund") is to provide
high current income by investing in fixed income securities. In addition, as
part of its investment objective, the Fund will seek to take advantage of
opportunities to realize significant capital appreciation while maintaining a
high level of current income. No assurance can be given that the Fund's
investment objective will be achieved. See "Investment Objective and Policies."
The Fund is a non-diversified series of MFS Series Trust VIII (the "Trust"). The
minimum initial investment generally is $1,000 per account (see "Purchases").
THE FUND MAY INVEST UP TO 50% OF ITS ASSETS IN LOWER RATED BONDS, COMMONLY KNOWN
AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE
FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE
RISKS BEFORE INVESTING (SEE "INVESTMENT OBJECTIVE AND POLICIES -- CORPORATE DEBT
SECURITIES"). AN INVESTMENT IN SHARES OF THE FUND SHOULD NOT BE CONSIDERED TO
CONSTITUTE A COMPLETE INVESTMENT PROGRAM AND MAY NOT BE APPROPRIATE FOR
INVESTORS WHO CANNOT ASSUME THE GREATER RISK OF CAPITAL DEPRECIATION INHERENT IN
SEEKING HIGHER INCOME AND SIGNIFICANT CAPITAL APPRECIATION. The Fund's
investment adviser and distributor are Massachusetts Financial Services Company
("MFS" or the "Adviser") and MFS Fund Distributors Inc., ("MFD"), respectively,
both of which are located at 500 Boylston Street, Boston, Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Fund that a
prospective investor ought to know before investing. The Fund has filed with the
Securities and Exchange Commission a Statement of Additional Information, dated
March 1, 1995 which contains more detailed information about the Fund and is
incorporated into this Prospectus by reference. See page 31 for a further
description of the information set forth in the Statement of Additional
Information. A copy of the Statement of Additional Information may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 62
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares (as a
percentage of offering price) ........................................ 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) ................ See Below<F1> 4.00% 0.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
Management Fees (after fee reduction)<F2> .............................. 0.75% 0.75% 0.75%
Rule 12b-1 Fees ........................................................ 0.35%<F3> 1.00%<F4> 1.00%<F4>
Other Expenses (after fee reduction)<F5> ............................... 0.40% 0.47% 0.40%<F6>
Total Operating Expenses (after fee reduction)<F7> ..................... 1.50% 2.22% 2.15%
- ----------------
<FN>
<F1> Purchases of $1 million or more are not subject to an initial sales charge;
however, a contingent deferred sales charge ("CDSC") of 1% will be imposed
on such purchases in the event of certain redemption transactions within 12
months following such purchases (see "Purchases").
<F2> Absent the voluntary waiver of management fees described under "Management
of the Fund," "Management Fees" would be 1.07%.
<F3> The Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of average daily net assets attributable to the Class A
shares (see "Distribution Plans"). After a substantial period of time,
distribution expenses paid under this plan, together with the initial sales
charge, may total more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
<F4> The Fund has adopted Distribution Plans for its Class B and C shares in
accordance with Rule 12b-1 under the 1940 Act, which provides that it will
pay distribution/service fees aggregating up to (but not necessarily all
of) 1.00% per annum of the average daily net assets attributable to the
Class B shares under the Class B Distribution Plan and the Class C shares
under the Class C Distribution Plan (see "Distribution Plans"). After a
substantial period of time, distribution expenses paid under these plans,
together with any CDSC, may total more than the maximum sales charge that
would have been permissible if imposed entirely as an initial sales charge.
<F5> The Adviser has voluntarily agreed to bear expenses of each class of shares
of the Fund that exceed 1.50%, 2.22% and 2.15% per annum for Class A, B and
C shares, respectively. Absent these expense reductions, "Other Expenses"
would have been 0.83%, 0.90% and 0.83%, per annum for Class A, B and C
shares, respectively.
<F6> Except for the shareholder servicing agent fee component, "Other Expenses"
for Class C shares is based on Class A expenses incurred during the fiscal
year ended October 31, 1994. The shareholder servicing agent fee component
of "Other Expenses" is a predetermined percentage based upon the Fund's net
assets attributable to each class.
<F7> Absent any expense reductions, "Total Operating Expenses" would have been
2.27%, 2.99% and 2.92% per annum for Class A, B and C shares, respectively.
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and, unless otherwise
noted, (b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
- ------ ------- ------- -------
<S> <C> <C> <C> <C>
(1)
1 year ................. $ 62 $ 63 $ 23 $ 22
3 years ................ 93 99 69 67
5 years ................ 125 139 119 115
10 years ................ 218 237(2) 237(2) 248
- ------------
</TABLE>
<PAGE> 63
(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 -- "Management of the Fund -- Investment Adviser"; and (iv) Rule
12b-1 (I.E., distribution and service plan) fees -- "Distribution Plans."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on July 31, 1987. The Trust presently consists of
two series of shares, each of which represents a portfolio with separate
investment policies. The Trust's predecessor (and the predecessor to the Fund),
MFS Income & Opportunity Trust, operated as a closed-end management investment
company prior to May 6, 1991. Shares of the Fund are sold continuously to the
public and the Fund then uses the proceeds to buy securities (primarily foreign
and domestic debt securities) for its portfolio. Three classes of shares of the
Fund currently are offered to the general public. Class A shares are offered at
net asset value plus an initial sales charge (or a CDSC in the case of certain
purchases of $1 million or more) and subject to a Distribution Plan providing
for a distribution fee and a service fee. Class B shares are offered at net
asset value without an initial sales charge but subject to a CDSC and a
Distribution Plan providing for a distribution fee and a service fee which are
greater than the Class A distribution fee and service fee. Class B shares will
convert to Class A shares approximately eight years after purchase. Class C
shares are offered at net asset value without an initial sales charge or a CDSC
but are subject to a Distribution Plan providing for an annual distribution fee
and service fee which are equal to the Class B annual distribution fee and
service fee. Class C shares do not convert to any other class of shares of the
Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for its operations. The Adviser manages
the portfolio from day to day in accordance with the Fund's investment objective
and policies. A majority of the Trustees are not affiliated with the Adviser.
The Fund also offers to buy back (redeem) its shares from its shareholders at
any time at net asset value less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the financial
statements included in the Fund's Annual Report to Shareholders which are
incorporated by reference into the Statement of Additional Information in
reliance upon the report of Ernst & Young LLP, independent auditors, as experts
in accounting and auditing. For the period from October 29, 1987 (commencement
of investment operations) to October 31, 1993, Coopers & Lybrand served as the
Fund's independent accountants and were responsible for auditing the Fund's
financial statements and issuing reports for those fiscal years. Prior to May 6,
1991, the Fund's predecessor operated as a closed-end management investment
company (see "The Fund" above).
<PAGE> 64
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
CLASS A, CLASS B AND CLASS C SHARES
YEAR ENDED OCTOBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1994 1993 1992 1991 1990 1989 1988
- ---------------------- ------- ------- ------ ------ ------ ------ ------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of period ........ $ 8.34 $ 8.00 $ 8.12 $ 7.56 $ 8.93 $ 9.60 $ 9.21
------ ------ ------ ------ ------ ------ ------
Income from investment operations--
Net investment income ..................... $ 0.48<F7> $ 0.52<F7> $ 0.63<F7> $ 0.73<F7> $ 0.86<F7> $ 0.94 $ 0.93
Net realized and unrealized gain (loss)
on investments .......................... (0.74) 0.42 0.08 0.95 (1.03) (0.38) 0.56
------ ------ ------ ------ ------ ------ ------
Total from investment operations ........ $ (0.26) $ 0.94 $ 0.71 $ 1.68 $ (0.17) $ 0.56 $ 1.49
------ ------ ------ ------ ------ ------ ------
Less distributions declared to shareholders--
From net investment income ................ $ -- $ (0.24) $ (0.56) $ (0.73) $ (0.82) $ (1.18) $ (0.69)
From net realized gain oninvestments ...... -- (0.32) -- -- -- -- (0.41)
In excess of net investment income and
foreign currency ........................ (0.06) -- -- -- -- -- --
In excess of net realized gain on
investments ............................. (0.04) -- -- -- -- -- --
From paid-in capital ...................... (0.41) (0.04) (0.27) (0.39) (0.38) (0.05) --
------ ------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders .......................... $ (0.51) $ (0.60) $ (0.83) $ (1.12) $ (1.20) $ (1.23) $ (1.10)
------ ------ ------ ------ ------ ------ ------
Net asset value -- end of period ............ $ 7.57 $ 8.34 $ 8.00 $ 8.12 $ 7.56 $ (8.93) $ 9.60
====== ====== ====== ====== ====== ====== ======
Total return<F5> ............................ (3.15)% 12.36% 9.02% 23.78% (1.62)% 5.85% 16.60%
RATIOS (TO AVERAGE DAILY NET ASSETS)/SUPPLEMENT DATA:
Expenses .................................. 1.71%<F7> 1.98%<F7> 2.02%<F7> 1.87%<F7> 1.47%<F7> 1.82% 1.75%
Net investment income ..................... 6.11%<F7> 5.92%<F7> 7.47%<F7> 9.26%<F7> 10.42%<F7> 10.05% 9.74%
PORTFOLIO TURNOVER .......................... 153% 275% 423% 671% 400% 157% 270%
NET ASSETS AT END OF PERIOD (000 OMITTED) ... $44,032 $60,120 $77,487 $76,312 $74,555 $87,978 $93,819
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1987<F1> 1994<F6> 1993<F2> 1994<F3>
- ---------------------- -------- ------- ------- -------
CLASS B CLASS C
- ----------------------------------------------------------------------------------------------
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
<S> <C> <C> <C> <C>
Net asset value--beginning of period ......... $ 9.35 $ 8.33 $ 8.28 $ 7.53
--------- ----- ------- -------
Income from investment operations--
Net investment income ...................... $ 0.0025 $ 0.45<F7> $ 0.04 $ 0.07
Net realized and unrealized gain (loss)
on investments ........................... (0.1425) (0.78) 0.05 0.02
--------- ------ ------- ------
Total from investment operations ......... $ (0.1400) $(0.33) $ 0.09 $ 0.09
Less distributions declared to shareholders --
From net investment income ................. $ -- $ -- $ (0.03) $ --
From net realized gain on investments ...... -- -- (0.01) --
In excess of net investment income and
foreign currency ......................... -- (0.05) -- --
In excess of net realized gain on
investments .............................. -- (0.03) -- --
From paid-in capital ....................... -- (0.39) -- (0.09)
------- ------ ------- -------
Total distributions declared to
shareholders ........................... $ 0.00 $(0.47) $ (0.04) $ (0.09)
------- ------ ------- -------
</TABLE>
<PAGE> 65
<TABLE>
<S> <C> <C> <C> <C>
Net asset value -- end of period ..................... $ 9.21 $ 7.53 $ 8.33 $ 7.53
======= ====== ======= =======
Total return<F5> ..................................... (1.50)% (3.97)% 1.15% 1.23%
RATIOS (TO AVERAGE DAILY NET ASSETS)/SUPPLEMENT DATA:
Expenses ........................................... 0.57%<F4> 2.43% 3.03%<F4> 2.16%<F4><F7>
Net investment income .............................. 4.88%<F4> 5.97% 5.22%<F4> 8.99%<F4><F7>
PORTFOLIO TURNOVER ................................... 0% 153% 275% 153%
NET ASSETS AT END OF PERIOD (000 OMITTED) ............ $ 78,479 $5,350 $ 265 $ 13
- ----------
<FN>
<F1> For the period from the October 29, 1987 (commencement of investment
operations) to October 31, 1987.
<F2> For the period from the commencement of offering of Class B shares,
September 7, 1993, to October 31, 1993.
<F3> For the period from the commencement of offering of Class C shares,
September 1, 1994 to October 31, 1994.
<F4> Annualized.
<F5> The results do not include the sales charge. If the charge had been
included, the results would have been lower.
<F6> Per share data for the period were calculated using the average share
method.
<F7> The investment adviser did not impose a portion of its management fee for
the periods indicated. If this fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1994 1993 1992 1991 1990 1989 1988
- ---------------------- ------- ------- ------ ------ ------ ------ ------
CLASS A
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income $0.44 $0.49 $0.61 $0.71 $0.83 -- --
RATIOS (TO AVERAGE NET ASSETS):
Expenses 2.21% 2.14% 2.21% 2.16% 1.81% -- --
Net investment income 5.62% 5.76% 7.55% 8.97% 10.08% -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1987<F1> 1994<F6> 1993<F2> 1994<F3>
- ---------------------- -------- -------- -------- --------
CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income -- $0.41 -- $0.09
RATIOS (TO AVERAGE NET ASSETS):
Expenses -- 2.92% -- 2.65%
Net investment income -- 5.48% -- 8.50%
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to provide high
current income by investing in fixed income securities. In addition, as part of
its investment objective, the Fund will seek to take advantage of opportunities
to realize significant capital appreciation while maintaining a high level of
current income. The Fund will attempt to achieve this objective by allocating
portfolio assets among various categories of fixed income securities as
described below. For this purpose the Fund will consider preferred stocks to be
fixed income securities. On its fixed income investments, the Fund will seek to
earn high current income in comparison to the income available on U.S.
Government Securities (as defined below). The Fund may also invest up to 25% of
its assets in equity securities. The Adviser will monitor the Fund's portfolio
performance on an ongoing basis and reallocate assets in response to actual and
anticipated market and economic changes. Any investment involves risk and there
can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES -- The Adviser will determine, based upon current yields and
<PAGE> 66
the appreciation potential of various categories of fixed income and equity
securities, the relative portions of the Fund's assets which should be invested
in particular securities; however, under normal market conditions at least 65%
of the Fund's assets will be invested in income-producing securities. Fixed
income securities can appreciate in value as a result of declines in interest
rates, improvements in credit ratings and other factors. In pursuing its
objective, the Fund will consider the preservation of capital by balancing the
yields and appreciation potential of securities which it may purchase against
their attendant risks. For the risk considerations involved, see "Risk Factors"
below.
The securities in which the Fund may invest its assets are: (i) securities that
are issued or guaranteed as to interest and principal by the U.S. Government,
its agencies, authorities or instrumentalities ("U.S. Government Securities");
(ii) fixed income securities issued by foreign governments and their political
subdivisions and fixed income and equity securities of non-U.S. issuers; (iii)
corporate fixed income securities, some of which may involve equity features;
(iv) equity securities of established companies; (v) equity securities of
emerging growth companies; (vi) obligations and equity securities of banks or
savings and loan associations (including certificates of deposit and bankers'
acceptances); (vii) long- or short-term municipal securities; (viii) restricted
securities; (ix) corporate asset-backed securities; (x) collateralized mortgage
obligations and multiclass pass-through securities; (xi) stripped
mortgage-backed securities; and (xii) to the extent available and permissible,
options and futures contracts on securities, currencies and indices. Each of
these securities is more fully described below.
U.S. GOVERNMENT SECURITIES: The Fund may invest in U.S. Government Securities,
which include (i) U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance: U.S. Treasury bills (maturities of one
year or less), U.S. Treasury notes (maturities of one to 10 years), and U.S.
Treasury bonds (generally maturities of greater than 10 years), all of which are
backed by the full faith and credit of the United States; and (ii) obligations
issued or guaranteed by U.S. Government agencies or instrumentalities, some of
which are backed by the full faith and credit of the U.S. Treasury, e.g., direct
pass-through certificates of the Government National Mortgage Association; some
of which are supported by the right of the issuer to borrow from the U.S.
Government, e.g., obligations of Federal Home Loan Banks; and some of which are
backed only by the credit of the issuer itself, e.g., obligations of the Student
Loan Marketing Association. U.S. Government securities also include interests in
trusts or other entities representing interests in obligations that are issued
or guaranteed by the U.S. Government, its agencies, authorities or
instrumentalilties. For a description of obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, see Appendix A.
Some U.S. Government Securities do not generally involve the credit risks
associated with other types of interest bearing securities, although, as a
result, the yields available from U.S. Government Securities are generally lower
than the yields available from corporate interest bearing securities. Like other
interest bearing securities, however, the values of U.S. Government Securities
change as interest rates fluctuate.
FOREIGN SECURITIES: The Fund may invest up to 50% (and expects generally to
invest between 25% and 50%) of its total assets in foreign securities which are
not traded on a U.S. exchange (not including American Depositary Receipts). The
Adviser does not believe that the credit risk inherent in the obligations of
stable foreign governments is significantly greater than that of U.S. Government
obligations. The Fund may also invest in fixed income and equity securities of
non-U.S. issuers and securities of domestic issuers denominated in a foreign
currency. Such securities may include corporate debt securities, established
company equity securities, emerging growth equity securities, bank obligations
and bank equity securities (described below) in which the Fund may invest in
accordance with its investment objective. For the risk considerations involved,
see "Risks of Investment in Foreign Securities." The percentage of the Fund's
assets invested in securities issued abroad and denominated in foreign
currencies will vary depending on the relative yield of such securities, the
relative appreciation potential of such securities, the state of the economies
of the countries in which the investments are made and such countries' financial
markets, and the relationship of such countries' currencies to the U.S. dollar.
Currency is judged on the basis of fundamental economic criteria (e.g., relative
inflation levels and trends, growth rate forecasts, balance of payments status,
and economic policies) as well as technical and political data. In addition to
the foregoing, interest rates are evaluated on the basis of differentials or
<PAGE> 67
anomalies that may exist between different countries. To the extent the Fund
invests in foreign securities, under normal conditions the Fund's portfolio of
foreign securities will include those of a number of foreign countries. The Fund
may hold foreign currency for hedging purposes to protect against declines in
the U.S. dollar value of foreign securities held by the Fund and against
increases in the U.S. dollar value of the foreign securities which the Fund
might purchase. The Fund will not invest 25% or more of the value of its assets
in the securities of any one foreign government. The Fund may also hold foreign
currency in anticipation of purchasing foreign securities.
EMERGING MARKET SECURITIES: The securities in which the Fund may invest include
fixed income securities of issuers (including foreign governments and their
subdivisions, agencies or instrumentalities) located in emerging markets. For
the purposes of the Fund, emerging markets include any country: (i) having an
"emerging stock market" as defined by the International Finance Corporation;
(ii) with low-to-middle-income economies according to the International Bank for
Reconstruction and Development (the World Bank); (iii) listed in World Bank
publications as developing; or (iv) determined by MFS to be an emerging market
as defined above. The Fund may invest in fixed income securities of: (i) foreign
governments or any of their political subdivisions, agencies or
instrumentalities; (ii) companies the principal securities trading market for
which is an emerging market country; (iii) companies organized under the laws
of, and with a principal office in, an emerging market country; (iv) companies
whose principal activities are located in emerging market countries; or (v)
companies whose securities are traded in any market that derive 50% or more of
their total revenue from either goods or services produced in an emerging market
or sold in an emerging market. The Fund's investments in foreign emerging market
debt obligations is subject to the Fund's policy of investing no more than 50%
of its total assets in foreign securities (not including American Depositary
Receipts).
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, Ecuador, Mexico, Nigeria, the Philippines, Poland, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADRs trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as exchange rates and more limited information about foreign issuers. See
the Statement of Additional Information for further discussion of foreign
securities and the holding of foreign currency, as well as the associated risks.
CORPORATE DEBT SECURITIES: Corporate debt securities of both domestic and
foreign issuers in which the Fund may invest include preferred and preference
stock and all types of long- or short-term debt obligations, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
conditional sales contracts and commercial paper. Corporate fixed income
securities may involve equity features, such as conversion or exchange rights or
warrants for the acquisition of stock of the same or a different issuer;
<PAGE> 68
participations based on revenues, sales or profits; or the purchase of common
stock in a unit transaction (where corporate debt securities and common stock
are offered as a unit).
Corporate debt securities in which the Fund may invest are ordinarily in the
lower rating categories of recognized rating agencies (that is, ratings of Ba or
lower by Moody's Investors Service, Inc. ("Moody's"), or BB or lower by Standard
& Poor's Ratings Group ("S&P" or Fitch Investors Service, Inc. ("Fitch")) (and
comparable unrated securities) (commonly known as "junk bonds"). For a
description of these and other rating categories, see Appendix B. No minimum
rating standard is required for a purchase by the Fund. These securities are
considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers of
such securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories and, because yields vary over time, no specific level of income can
ever be assured. These lower rated, high yielding fixed income securities
generally tend to be affected by economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities, which react
primarily to fluctuations in the general level of interest rates (although these
lower rated securities are also affected by changes in interest rates as
described below under "Risk Factors"). In the past, economic downturns or an
increase in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. During certain
periods, the higher yields on the Fund's lower rated, high yielding fixed income
securities are paid primarily because of the increased risk of loss of principal
and income, arising from such factors as the heightened possibility of default
or bankruptcy of the issuers of such securities. Due to the fixed income
payments of these securities, the Fund may continue to earn the same level of
interest income while its net asset value declines due to portfolio losses,
which could result in an increase in the Fund's yield despite the actual loss of
principal. The prices for these securities may be affected by legislative and
regulatory developments. For example, federal rules require that savings and
loan associations gradually reduce their holdings of high yield securities. An
effect of such legislation may be to depress the prices of outstanding lower
rated, high yielding fixed income securities. The market for these lower rated
fixed income securities may be less liquid than the market for investment grade
fixed income securities. Furthermore, the liquidity of these lower rated
securities may be affected by the market's perception of their credit quality.
Therefore, the Adviser's judgment may at times play a greater role in valuing
these securities than in the case of investment grade fixed income securities,
and it also may be more difficult during times of certain adverse market
conditions to sell these lower rated securities to meet redemption requests or
to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. The Fund's achievement of
its investment objective may be more dependent on the Adviser's own credit
analysis than in the case of an investment company primarily investing in higher
quality fixed income securities.
For a chart indicating the composition of the bond portion of the Fund's
portfolio for the fiscal year ended October 31, 1994, with the debt securities
separated into rating categories, see Appendix C to this Prospectus.
ESTABLISHED COMPANY EQUITY SECURITIES: The Fund may invest in common stocks and
warrants of 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.
EMERGING GROWTH EQUITY SECURITIES: The Fund may invest in common stocks and
warrants of small and medium-sized companies that are early in their life cycle,
but which have the potential to become major enterprises (emerging growth
companies). Such companies would generally have annual gross revenues ranging
from $10 million to $1 billion, 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 have the products, management and market opportunities necessary
<PAGE> 69
to become more widely recognized as growth companies.
BANK OBLIGATIONS AND BANK EQUITY SECURITIES: The Fund may invest in obligations
of domestic and foreign banks which, at the date of investment, have capital,
surplus and undivided profits (as of the date of their most recently published
financial statements) in excess of $100 million. The Fund may invest in debt
obligations of other banks or savings and loan associations if such obligations
are insured by the Federal Deposit Insurance Corporation. In addition, the Fund
may invest in the equity securities of banks or savings and loan associations in
accordance with its investment objective and policies with respect to equity
investments. For the risk considerations involved, see "Risk Factors" below.
MUNICIPAL OBLIGATIONS: The Fund may invest in municipal obligations issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities when the Adviser determines that they offer the highest income
available, except where differences in yield are not sufficient to justify
investments in higher risk securities. Such municipal obligations may be unrated
or in the medium and lower rating categories of recognized rating agencies,
which securities are speculative, involve high risk and are questionable as to
principal and interest payments. For the risk considerations involved, see "Risk
Factors" below.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to the Fund's limitations on investing not
more than 15% of its net assets in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will carefully
monitor the Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's 15% limitation on investments in
illiquid investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result, the Fund
might not be able to sell these securities when the Adviser wishes to do so, or
might have to sell them at less than fair value. In addition, market quotations
are less readily available. Therefore, judgment may at times play a greater role
in valuing these securities than in the case of unrestricted securities.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the Statement of Additional
Information for further information on these securities.
SECURITIES PURCHASED AT A DISCOUNT: When and if available, fixed income
securities may be purchased at a discount from face value. However, the Fund
does not intend to hold such securities to maturity for the purpose of achieving
potential capital gains, unless current yields on these securities remain
attractive.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Debt securities in
which the Fund may invest also include zero coupon bonds, deferred interest
bonds and bonds on which the interest is payable in kind ("PIK bonds"). Zero
coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
<PAGE> 70
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors than debt obligations which make regular
payments of interest. The Fund will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities under disadvantageous circumstances to
satisfy the Fund's distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation, but
also may be collateralized by whole loans or private mortgage pass-through
securities (such collateral collectively referred to as "Mortgage Assets"). The
Fund may also invest a portion of its assets in multiclass pass-through
securities which are interests in a trust composed of Mortgage Assets. CMOs
(which include multiclass pass-through securities) may be issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Payments of principal of and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through securities.
In a CMO, a series of bonds or certificates is usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranche", is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or part of the premium if any has been paid.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs, parallel pay CMOs and PAC Bonds and
the risks related to transactions therein, see the Statement of Additional
Information.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may also invest a portion of its
assets in stripped mortgage-backed securities ("SMBS"), which are derivative
multiclass mortgage securities usually structured with two classes that receive
different proportions of interest and principal distributions from an underlying
pool of mortgage assets. For a further description of SMBS and the risks related
to transactions therein, see the Statement of Additional Information.
OTHER INVESTMENTS: When the Adviser believes that investing for defensive
purposes is appropriate, such as during periods of unusual market conditions, or
when relative yields are deemed attractive, part or all of the Fund's assets may
be temporarily invested in cash (including foreign currency) or cash equivalent
short-term obligations including, but not limited to, certificates of deposit,
commercial paper, short-term notes, obligations issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities and repurchase
agreements.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Fund has adopted
certain procedures intended to minimize any such risk.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion
<PAGE> 71
of its assets in "loan participations and other direct indebtedness." By
purchasing a loan participation, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, and most impose restrictive covenants which must be met
by the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods and services. These claims may
also be purchased at a time when the company is in default. Certain of the loan
participations acquired by the Fund may involve revolving credit facilities or
other standby financing commitments which obligate the Fund to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Fund may be unable to
sell such investments at an opportune time or may have to resell them at less
than fair market value. For a further discussion of loan participations and the
risks related to transactions therein, see the Statement of Additional
Information.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options on
securities ("Options") and purchase put and call Options on securities that are
traded on United States and foreign securities exchanges and over the counter.
The Fund will write such Options for the purpose of increasing its current
income and/or to protect the value of its portfolio. The Fund may also write
combinations of put and call Options on the same security, known as "straddles."
Such transactions can generate additional premium income but also present
increased risk. The Fund may purchase put or call Options in anticipation of
declines in the value of portfolio securities or increases in the value of
securities to be acquired. The Fund may from time to time write Options on all
securities held in its portfolio.
The Fund may also enter into options on the yield "spread," or yield
differential between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging (an effort to increase current
income) purposes. In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities rather than
the actual prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease. Yield curve options written by the Fund will be covered. The trading
of yield curve options is subject to all the risks associated with trading other
types of options, as discussed below under "Risk Factors" and in the Statement
of Additional Information. In addition, such options present risks of loss even
if the yield on one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated.
In certain instances, the Fund may enter into options on Treasury Securities
which may be referred to as "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option.
The Fund may purchase and sell options that are traded on U.S. and foreign
exchanges, and Options traded over-the-counter with broker-dealers who deal in
these Options. The ability to terminate over-the-counter Options is more limited
than with exchange-traded Options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The Fund
will treat assets used to cover over-the-counter Options as illiquid unless the
dealer is a primary dealer in U.S. Government securities and has given the Fund
the unconditional right to close such Options at a formula price, in which event
only an amount of the cover determined with reference to the formula will be
considered illiquid. The Fund may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
and purchase call and put options on domestic and foreign stock indices. The
Fund may write such options for the purpose of increasing its current income
<PAGE> 72
and/or to protect its portfolio against declines in the value of securities it
owns or increases in the value of securities to be acquired. When the Fund
writes an option on a stock index, and the value of the index moves adversely to
the holder's position, the option will not be exercised, and the Fund will
either close out the option at a profit or allow it to expire unexercised. The
Fund will thereby retain the amount of the premium, less related transaction
costs, which will increase its gross income and offset part of the reduced value
of portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by the Fund for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to the Fund's option position, the option may be exercised, and the
Fund will experience a loss which may only be partially offset by the amount of
the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund may enter into
contracts for the purchase or sale for future delivery of fixed income
securities or contracts based on municipal bond or other financial indices
including any index of U.S. or foreign securities ("Futures Contracts") and may
purchase and write options to buy or sell Futures Contracts ("Options on Futures
Contracts"). Futures Contracts and Options on Futures Contracts to be written or
purchased by the Fund will be traded on U.S. and foreign exchanges. These
investment techniques are designed to hedge against anticipated future changes
in interest or exchange rates which otherwise might either adversely affect the
value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date, and may also be
used for non-hedging purposes to the extent permitted by applicable law. The
Fund will incur brokerage fees when it purchases and sells Futures Contracts,
and will be required to maintain margin deposits. In addition, Futures Contracts
entail risks. Although the Adviser believes that use of such contracts will
benefit the Fund, if its investment judgment about the general direction of
interest or exchange rates is incorrect, the Fund's overall performance may be
poorer than if it had not entered into any such contract and the Fund may
realize a loss. Purchases of Options on Futures Contracts may present less risk
in hedging the portfolio of the Fund than the purchase or sale of the underlying
Futures Contracts, since the potential loss is limited to the amount of the
premium paid for the option, plus related transaction costs. The writing of such
options, however, does not present less risk than the trading of Futures
Contracts, and will constitute only a partial hedge, up to the amount of the
premium received, less related transaction costs. In addition, if an option is
exercised, the Fund may suffer a loss on the transaction.
In order to assure that the Fund will not be deemed to be a "commodity pool" for
purposes of the Commodity Exchange Act, regulations of the CFTC require that the
Fund enter into transactions in Futures Contracts and Options on Futures
Contracts only (i) for bona fide hedging purposes (as defined in CFTC
regulations), or (ii) for non-hedging purposes, provided that the aggregate
initial margin and premiums on such non-hedging positions does not exceed 5% of
the liquidation value of the Fund's assets. In addition, the Fund must comply
with the requirements of various state securities laws in connection with such
transactions.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the use of such Futures Contract is
unleveraged.
In addition, the Board of Trustees has adopted two percentage restrictions on
the use of Futures Contracts. The first restriction is that the Fund will not
enter into any Futures Contracts and Options on Futures Contracts if immediately
thereafter the amount of initial margin deposits on all the Futures Contracts
and Options on Futures Contracts of the Fund and premiums paid on Options on
Futures Contracts would exceed 5% of the market value of the total assets of the
Fund. The second restriction is that the aggregate market value of the Futures
Contracts held by the Fund not exceed 50% of the market value of the total
assets of the Fund. Neither of these restrictions will be changed by the Fund's
<PAGE> 73
Board of Trustees without considering the policies and concerns of the various
federal and state regulatory agencies.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the dollar cost of foreign securities to be acquired.
As in the case of other types of options, however, the writing of an Option on
Foreign Currency will constitute only a partial hedge, up to the amount of the
premium received, and the Fund may be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an Option on Foreign Currency may constitute an effective hedge
against fluctuations in exchange rates, although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
paid for the option plus related transaction costs. Options on Foreign
Currencies to be written or purchased by the Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a fixed quantity
of a foreign currency at a future date at a price set at the time of the
contract ("Forward Contracts"). The Fund will enter into Forward Contracts for
hedging purposes as well as for the non-hedging purpose of increasing the Fund's
current income. By entering into transactions in Forward Contracts, however, the
Fund may be required to forego the benefits of advantageous changes in exchange
rates and, in the case of Forward Contracts entered into for non-hedging
purposes, the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative. Forward Contracts are
traded over-the-counter, and not on organized commodities or securities
exchanges. As a result, such contracts operate in a manner distinct from
exchange-traded instruments, and their use involves certain risks beyond those
associated with transactions in Futures Contracts or options traded on
exchanges. The Fund may also enter into a Forward Contract on one currency in
order to hedge against risk of loss arising from fluctuations in the value of a
second currency (referred to as a "cross hedge") if, in the judgment of the
Adviser, a reasonable degree of correlation can be expected between movements in
the values of the two currencies. The Fund has established procedures consistent
with statements of the Securities and Exchange Commission (the "SEC") and its
staff regarding the use of Forward Contracts by registered investment companies,
which requires use of segregated assets or "cover" in connection with the
purchase and sale of such contracts.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Fund with another party of cash
payments based upon different interest rate indexes, currencies, and other
prices or rates such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a principal
amount determined by the parties.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease the Fund's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of the Fund's investments and its share price and yield.
<PAGE> 74
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the Statement of Additional Information on the risks involved
in these activities.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities under present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the SEC. 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,
including cash, cash equivalents or U.S. Government Securities maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. If the Adviser determines to make securities loans, it is intended that
the value of the securities loaned would not exceed 30% of the value of the
Fund's total assets.
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" OR FORWARD DELIVERY SECURITIES: Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. Although the Fund is
not limited to the amount of securities for which it may have commitments to
purchase on such basis, it is expected that under normal circumstances, the Fund
will not commit more than 30% of its assets to such purchases. The Fund does not
pay for the securities until received or start earning interest on them until
the contractual settlement date. In order to invest its assets immediately,
while awaiting delivery of securities purchased on such bases, the Fund will
hold cash, short-term money market instruments or U.S. Government Securities in
a segregated account.
PORTFOLIO TRADING: The portfolio will be managed actively and the asset
allocations modified as the Adviser deems necessary. Although the Fund does not
intend to seek short-term profits, securities in its portfolio will be sold
whenever the Adviser believes it is appropriate to do so without regard to the
length of time the particular asset may have been held, subject to tax
requirements for the Fund's qualification as a regulated investment company. A
high turnover rate involves greater expenses, including higher brokerage and
transaction costs, to the Fund. The Fund engages in portfolio trading if the
Adviser believes a transaction net of costs (including custodian charges) will
help in achieving the Fund's investment objective.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Fund's distributor, as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
From time to time, the Adviser may direct certain portfolio transactions to
broker-dealer firms which, in turn, have agreed to pay a portion of the Fund's
operating expenses (e.g., fees charged by the custodian of the Fund's assets).
For a further discussion of portfolio trading, see the Statement of Additional
Information.
<PAGE> 75
RISK FACTORS: The value of shares of the Fund will vary as the aggregate value
of the Fund's portfolio securities increases or decreases. The net asset value
of the Fund may change as the general levels of interest rates fluctuate. When
interest rates decline, the value of a portfolio of fixed income securities can
be expected to rise. Conversely, when interest rates rise, the value of a
portfolio of fixed income securities can be expected to decline. Moreover, the
value of the lower-rated fixed income securities that the Fund purchases will
fluctuate more than the value of higher-rated fixed income securities. These
lower-rated fixed income securities generally tend to reflect short-term
corporate and market developments to a greater extent than higher-rated
securities, which react primarily to fluctuations in the general level of
interest rates. See "Corporate Debt Securities" above for additional discussion
of the risks of investing in lower rated securities.
Although changes in the value of the Fund's portfolio securities subsequent to
their acquisition are reflected in the net asset value of shares of the Fund,
such changes will not affect the income received by the Fund from such
securities. The dividends paid by the Fund will increase or decrease in relation
to the income received by the Fund from its investments, which will in any case
be reduced by the Fund's expenses before being distributed to the Fund's
shareholders.
If the Adviser's expectations of changes in interest rates or its evaluation of
the normal yield relationship between two securities proves to be incorrect, the
Fund's income, net asset value and potential capital gain may be decreased or
its potential capital loss may be increased. The Adviser's reallocation of Fund
assets in response to actual and anticipated market and economic changes may
result in the Fund not achieving anticipated benefits, or experiencing losses,
should the Adviser's reallocation decision be incorrect.
The Fund has registered as a "non-diversified" investment company. As a result,
the Fund is limited as to the percentage of its assets which may be invested in
the securities of any one issuer only by its own investment restrictions and the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended. U.S. Government Securities are not subject to any investment
limitation. Since the Fund may invest a relatively high percentage of its assets
in a limited number of issuers, the Fund may be more susceptible to any single
economic, political or regulatory occurrence and to the financial conditions of
the issuers in which it invests. For these reasons, an investment in shares of
the Fund should not be considered to constitute a complete investment program
and may not be appropriate for investors who cannot assume the greater risk of
capital depreciation inherent in seeking higher income and significant capital
appreciation.
The Fund may invest up to 25% of its total assets in equity securities of
emerging growth and established companies and banks and savings and loan
associations. Investing in emerging growth companies involves greater risk than
is customarily associated with investing in more established companies. Emerging
growth companies often have limited product lines, markets or financial
resources, and they may be dependent on one-person management. The securities of
emerging growth companies may have limited marketability and may be subject to
more abrupt or erratic market movements than securities of larger, more
established companies or the market averages in general. Similarly, many of the
securities offering the capital appreciation sought by the Fund will involve a
higher degree of risk than would established growth stocks. The Fund will seek
to reduce risk by investing its assets in a number of markets and issuers,
performing credit analyses of potential investments and monitoring current
developments and trends in both the economy and financial markets.
Banks and savings and loan associations are subject to extensive government
regulation which may restrict the types of activities in which they can engage.
The profitability of such entities is affected by interest rate levels, price
and marketing competition and the availability and cost of capital funds.
Recently, banks and savings and loan associations have experienced a decline in
the credit quality of loans in their portfolios and in the value of their
assets. In addition, such entities are especially sensitive to a general
deterioration in economic conditions. Investments in foreign banks and savings
and loan associations involve risks similar to investments in U.S. banks and
savings and loan associations, but see also "Risks of Investment in Foreign
Securities" below.
Although the Fund will enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Options on Foreign Currencies for hedging
<PAGE> 76
purposes, such transactions nevertheless involve certain risks. For example, a
lack of correlation between the instrument underlying an option or Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render the Fund's hedging strategy unsuccessful and could result in
losses. The Fund also may enter into transactions in such instruments for other
than hedging purposes, to the extent permitted by applicable law, which involves
greater risk. In particular, such transactions may result in losses for the Fund
which are not offset by gains on other portfolio positions, thereby reducing
gross income. In addition, foreign currency markets may be extremely volatile
from time to time. There also can be no assurance that a liquid secondary market
will exist for any contract purchased or sold, and the Fund may be required to
maintain a position until exercise or expiration, which could result in losses.
In addition, the Fund may be required or may elect to receive delivery of the
foreign currencies underlying Forward Contracts or Options on Foreign
Currencies, which may involve certain risks. In such instances, the Fund may
hold the foreign currency when, in the judgment of the Adviser, it would be
beneficial to convert such currency into U.S. dollars at a later date, based on
anticipated changes in the relevant exchange rate. The Statement of Additional
Information contains a description of the nature and trading mechanics of
Options, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies, and includes a discussion of the risks related to
transactions therein.
Transactions in Forward Contracts may be entered into only in the over-the-
counter market. Futures Contracts and Options on Futures Contracts may be
entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
options and Futures Contracts traded by the Fund will include U.S. Government
Securities as well as foreign securities. Because longer-term U.S. Government
Securities are favorable vehicles for an option writing program, from time to
time up to 100% of the Fund's portfolio may consist of such securities. Such
securities are among the most volatile U.S. Government Securities.
RISKS OF INVESTMENT IN FOREIGN SECURITIES: Investors should recognize that
transactions involving foreign equity or debt securities or foreign currencies,
and transactions entered into in foreign countries, involve considerations and
risks not typically associated with investing in U.S. markets. These include
changes in currency rates, exchange control regulations, governmental
administration or economic or monetary policy (in the U.S. or abroad) or
circumstances in dealings between nations. Costs may be incurred in connection
with conversions between various currencies. Special considerations may also
include more limited information about foreign issuers, higher brokerage costs,
different accounting standards and thinner trading markets. Foreign securities
markets may also be less liquid, more volatile and less subject to government
supervision than in the United States. Investments in foreign countries could be
affected by other factors including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations and could be subject
to extended settlement periods. While the holding of foreign currencies will
permit the Fund to take advantage of favorable movements in the applicable
exchange rate, it also exposes the Fund to risk of loss if such rates move in a
direction adverse to the Fund's position. Such losses could also adversely
affect the Fund's hedging strategies. See "Investment Objective, Policies and
Restrictions" in the Statement of Additional Information for further discussion
of the holding of foreign currency, as well as the associated risks.
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. These securities may be considered speculative and, while generally
offering higher income and the potential for capital appreciation, may present
significantly greater risk. Emerging markets may have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions. Delays in settlement could result in temporary periods when a
portion of the assets of the Fund is uninvested and no return is earned thereon.
The inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result in losses to the Fund due to subsequent declines in values of the
portfolio securities or, if the Fund has entered into a contract to sell the
security, possible liability to the purchaser. Certain markets may require
payment for securities before delivery. Securities prices in emerging markets
can be significantly more volatile than in the more developed nations of the
<PAGE> 77
world, reflecting the greater uncertainties of investing in less established
markets and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially prompt liquidation of substantial holdings difficult or
impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic movements.
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.
-----------------------
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
The Statement of Additional Information includes a discussion of investment
policies and a listing of specific investment restrictions which govern the
Fund's investment policies. The specific investment restrictions listed in the
Statement of Additional Information may not be changed without shareholder
approval. See "Investment Objective, Policies and Restrictions" in the Statement
of Additional Information.
The Fund's investment limitations, policies and rating standards are adhered to
at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated September 9, 1987 (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. James T. Swanson, a Senior Vice
President of the Adviser and a Vice President of the Trust, is the Fund's
portfolio manager. Mr. Swanson joined the Adviser in 1985 as a Vice President
and became the portfolio manager of the Fund in December, 1991. Subject to such
policies as the Trustees may determine, the Adviser makes investment decisions
for the Fund. For its services and facilities, the Adviser receives an annual
management fee computed and paid monthly, in an amount equal to the sum of .50%
of the average daily net assets of the Fund and 7.14% of the gross income (i.e.,
income other than gains from the sale of securities, gains from options and
futures transactions, or premiums from options written) of the Fund for the
then-current fiscal year. This management fee is greater than the fee paid by
most funds. Effective June 1, 1993, the Adviser has voluntarily reduced its
right to receive the fee set forth in the Advisory Agreement to a maximum of
0.75% of the average daily net assets of the Fund. The temporary reduction may
be rescinded at any time by the Adviser without notice to the shareholders. MFS
has voluntarily agreed to pay expenses of each class of shares of the Fund that
exceed 1.50%, 2.22% and 2.15% of the Fund's average daily net assets
attributable to Class A, Class B and Class C shares, respectively, on an
annualized basis. This temporary expense reduction may be rescinded at any time
by MFS without notice to shareholders of the Fund as to expenses accruing after
the date of rescission.
<PAGE> 78
For the Fund's fiscal year ended October 31, 1994, MFS voluntarily reduced its
management fee by $255,676 and therefore received $297,813 (of which $139,972
was based on average daily net assets and $157,841 on gross income) equivalent
on an annual basis, to 0.57% of the Fund's daily net assets. If MFS had not so
reduced its management fee, MFS would have received a management fee of $553,489
(of which $261,272 was based on average daily net assets and $292,217 on gross
income) equivalent on an annual basis to 1.06% of the Fund's 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 Union Standard Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven
variable accounts, each of which is a registered investment company established
by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly-owned subsidiary, MFS Asset Management
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $33.4 billion on behalf of approximately 1.6 million investor
accounts as of January 31, 1995. As of such date, the MFS organization managed
approximately $18.7 billion of assets invested in fixed income funds and fixed
income portfolios, approximately $6.8 billion of assets in U.S. Government
Securities, and approximately $10.8 billion of assets in equity securities. MFS
is a subsidiary of Sun Life of Canada (U.S.), which in turn is a subsidiary of
Sun Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are A.
Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott, John D. McNeil and John R.
Gardner. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott
is the Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil
and Gardner are the Chairman and President, respectively, of Sun Life. Sun Life,
a mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman, President
and a Trustee of the Trust. John D. Laupheimer, Jr., Leslie J. Nanberg, Jeffrey
L. Shames, James T. Swanson, Patricia A. Zlotin, W. Thomas London, Stephen E.
Cavan, James O. Yost and James R. Bordewick, Jr., all of whom are officers of
MFS, are officers of the Trust.
DISTRIBUTOR -- MFD, a wholly-owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. ( the "Shareholder
Servicing Agent"), a wholly-owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with MFD. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions may also charge their customers fees
relating to investments in the Fund.
The Fund offers three classes of shares which bear sales charges and
distribution fees in different forms and amounts:
CLASS A SHARES. Class A shares are offered at net asset value plus an initial
sales charge (or CDSC in the case of certain purchases of $1 million or more) as
follows:
<PAGE> 79
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
DEALER
SALES CHARGE* ALLOWANCE
AS PERCENTAGE OF: AS A
--------------------------- PERCENTAGE
NET OF
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ------------------ -------- -------- ----------
<S> <C> <C> <C>
Less than $100,000................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000...... 4.00 4.17 3.20
$250,000 but less than $500,000...... 2.95 3.04 2.25
$500,000 but less than $1,000,000.... 2.20 2.25 1.70
$1,000,000 or more................... None** None** See
Below**
<FN>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC may apply in certain circumstances. MFD (on behalf of the Fund) will
also pay a commission on purchases of $1 million or more.
</TABLE>
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% on the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase (other than
in connection with subsequent exchanges to other MFS Funds), the charge would
not be waived); (ii) distributions to participants from a retirement plan
qualified under section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code") (a "Retirement Plan"), due to: (a) a loan from the plan (repayments
of loans, however, will constitute new sales for purposes of assessing the
CDSC); (b) "financial hardship" of the participant in the plan, as that term is
defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to
time; or (c) the death of a participant, (iii) distributions from a 403(b) plan
or an Individual Retirement Account ("IRA") due to death, disability, or
attainment of age 59-1/2; (iv) tax-free returns of excess contributions to an
IRA; (v) distributions by other employee benefit plans to pay benefits; and (vi)
certain involuntary redemptions and redemptions in connection with certain
automatic withdrawals from a qualified retirement plan. The CDSC on Class A
shares will not be waived, however, if the Retirement Plan withdraws from the
Fund except if that Retirement Plan has invested its assets in Class A shares of
one or more of the MFS Funds for more than 10 years from the later to occur of
(i) January 1, 1993 or (ii) the date such Retirement Plan first invests its
assets in Class A shares of one or more of the MFS Funds, the CDSC on Class A
shares will be waived in the case of a redemption of all of the Retirement
Plan's shares (including shares of any other class) in all MFS Funds (i.e., all
the assets of the Retirement Plan invested in the MFS Funds are withdrawn),
unless, immediately prior to the redemption, the aggregate amount invested by
the Retirement Plan in Class A shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four year period equals 50% or
more of the total value of the Retirement Plan's assets in the MFS Funds, in
which case the CDSC will not be waived. The CDSC on Class A shares will be
waived upon redemption by a Retirement Plan where the redemption proceeds are
used to pay expenses of the Retirement Plan or certain expenses of participants
under the Retirement Plan (e.g., participant account fees), provided that the
Retirement Plan's sponsor subscribes to the MFS Fundamental 401(k) Plan(sm) or
another similar recordkeeping system made available by the Shareholder Servicing
Agent. The CDSC on Class A shares will be waived upon the transfer of
registration from shares held by a Retirement Plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A share accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants in the Retirement Plan, provided that the Retirement Plan's sponsor
<PAGE> 80
subscribes to the MFS Fundamental 401(k) Plan(sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. Any
applicable CDSC will be deferred upon an exchange of Class A shares of the Fund
for units of participation of the MFS Fixed Fund (a bank collective investment
fund) (the "Units"), and the CDSC will be deducted from the redemption proceeds
when such Units are subsequently redeemed (assuming the CDSC is then payable).
No CDSC will be assessed upon an exchange of Units for Class A shares of the
Fund. For purposes of calculating the CDSC payable upon redemption of Class A
shares of the Fund or Units acquired pursuant to one or more exchanges, the
period during which the Units are held will be aggregated with the period during
which the Class A shares are held. MFD shall receive all CDSCs.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately 34
of 1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain other MFS Funds and other funds
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period (or a 36-month period for purchases of $1
million or more) or special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may also be reduced is set forth in the Statement of Additional
Information. In addition, MFD will pay a commission to dealers who initiate and
are responsible for purchases of $1 million or more as follows: 1.00% on sales
up to $5 million; plus 0.25% on the amount in excess of $5 million. Purchases of
$1 million or more for each shareholder account will be aggregated over a
12-month period (commencing from the date of the first such purchase) for
purposes of determining the level of commissions to be paid during that period
with respect to such account.
Class A shares of the Fund may be sold at their net asset value to the officers
of the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which MFD serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided the shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pension,
profit-sharing or other retirement plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may be sold at their net asset value to any employee
or registered representative of any dealer or other financial institution which
has a sales agreement with MFD or its affiliates, to certain family members of
such employees or representatives and their spouses, or to any trust, pension,
profit-sharing or other retirement plan for the sole benefit of such employee or
representative, as well as to clients of MFS Asset Management Inc. Class A
shares may be sold at net asset value, subject to appropriate documentation,
through a dealer where the amount invested represents redemption proceeds from a
registered open-end management investment company not distributed or managed by
MFD or its affiliates if: (i) the redeemed shares were subject to an initial
sales charge or a deferred sales charge (whether or not actually imposed); (ii)
such redemption has occurred no more than 90 days prior to the purchase of Class
A shares of the Fund; and (iii) the Fund, MFD or its affiliates have not agreed
with such company or its affiliates, formally or informally, to sell Class A
shares at net asset value or provide any other incentive with respect to such
redemption and sale. Class A shares of the Fund may also be sold at net asset
value where the amount invested represents redemption proceeds from the MFS
Fixed Fund. In addition, Class A shares of the Fund may also be sold at net
asset value in connection with the acquisition or liquidation of the assets of
other investment companies or personal holding companies. Insurance company
separate accounts may purchase Class A shares of the Fund at their net asset
value. Class A shares of the Fund may be purchased at net asset value by
retirement plans whose third party administrators have entered into an
administrative services agreement with MFD or one or more of its affiliates to
perform certain administrative services, subject to certain operational
requirements specified from time to time by MFD or one of more of its
affiliates. Class A shares of the Fund may be purchased at net asset value
through certain broker-dealers and other financial institutions which have
entered into an agreement with MFD, which includes a requirement that such
<PAGE> 81
shares be sold for the benefit of clients participating in a "wrap account" or a
similar program under which such clients pay a fee to such broker-dealer or
other financial institution.
Class A shares of the Fund may be purchased at net asset value by retirement
plans qualified under Section 401(k) of the Code through certain broker- dealers
and other financial institutions which have entered into an agreement with MFD
which includes certain minimum size qualifications for such retirement plans and
provides that the broker-dealer or other financial institution will perform
certain administrative services with respect to the plan's account.
Class A shares of the Fund may be purchased at net asset value by certain
retirement plans subject to the Employee Retirement Income Security Act of 1974,
as amended, subject to the following:
(i) the sponsoring organization must demonstrate to the satisfaction of MFD
that either (a) the employer has at least 25 employees or (b) the aggregate
purchases by the retirement plan of Class A shares of the MFS Funds will be in
an amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole direction; and
(ii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by MFD, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that MFD may pay a commission, on sales in excess of $5 million to
certain retirement plans, of 1.00% to certain dealers which, at MFD's
invitation, enter into an agreement with MFD in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by MFD. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account. Class A
shares of the Fund may also be sold at net asset value through the automatic
reinvestment of Class A and Class B periodic distributions which constitute
required withdrawals from qualified retirement plans. Furthermore, Class A
shares of the Fund may be sold at net asset value through the automatic
reinvestment of distributions of dividends and capital gains of other MFS Funds
pursuant to the Distribution Investment Program.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First................................. 4%*
Second................................ 4%
Third................................. 3%
Fourth................................ 3%
Fifth................................. 2%
Sixth................................. 1%
Seventh and following................. 0%
<FN>
*Class B shares purchased from January 1, 1993 through September 1, 1993, will
be subject to a CDSC of 5% in the event of a redemption within the first year
after purchase.
</TABLE>
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First................................. 6%
<PAGE> 82
<S> <C>
Second................................. 5%
Third................................. 4%
Fourth................................. 3%
Fifth................................. 2%
Sixth................................. 1%
Seventh and following................. 0%
</TABLE>
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and Repurchases --
Contingent Deferred Sales Charge" for further discussion of the CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under section 401(a), 401(k) or 403(b) of the Code, due to death
or disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
Section 401(a) or 401(k) of the Code due to (i) returns of excess contribution
to the plan, (ii) retirement of a participant in the plan, (iii) a loan from the
plan (repayments of loans, however, will constitute new sales for purposes of
assessing the CDSC), (iv) "financial hardship" of the participant in the plan,
as that term is defined in Treasury Regulation Section 1.401(k)-1(d)(2), as
amended from time to time, and (v) termination of employment of the participant
in the plan (excluding, however, a partial or other termination of the plan).
The CDSC on Class B shares will be waived in the case of distributions from a
SAR-SEP due to (i) returns of excess contribution to the plan, (ii) retirement
of a participant in the plan and (iii) termination of employment of the
participant in the plan (excluding, however, a partial or other termination of
the plan). The CDSC on Class B shares will also be waived upon redemptions by
(i) officers of the Trust, (ii) any of the subsidiary companies of Sun Life,
(iii) eligible Directors, officers, employees (including retired employees) and
agents of MFS, Sun Life or any of their subsidiary companies, (iv) any trust,
pension, profit-sharing or any other benefit plan for such persons, (v) any
trustees and retired trustees of any investment company for which MFD serves as
distributor or principal underwriter, and (vi) certain family members of such
individuals and their spouses, provided in each case that the shares will not be
resold except to the Fund. The CDSC on Class B shares will also be waived in the
case of redemptions by any employee or registered representative of any dealer
or other financial institution which has a sales agreement with MFD, by certain
family members of such employee or representative and their spouses, by any
trust, pension, profit-sharing or other retirement plan for the sole benefit of
such employee or representative and by clients of the MFS Asset Management, Inc.
A retirement plan qualified under Retirement Plan that has invested its assets
in Class B shares of one or more of the MFS Funds Family of Funds (the "MFS
Funds") for more than 10 years from the later to occur of (i) January 1, 1993 or
(ii) the date the Retirement Plan first invests its assets in Class B shares of
one or more of the funds in the MFS Funds, will have the CDSC on Class B shares
waived in the case of a redemption of all the Retirement Plan's shares
(including any shares of any other class) in all MFS Funds (i.e., all the assets
of the Retirement Plan invested in the MFS Funds are withdrawn), except that if,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class B shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, then the CDSC will
not be waived. The CDSC on Class B shares will be waived upon redemption by a
Retirement Plan where the redemption proceeds are used to pay expenses of the
Retirement Plan or certain expenses of participants under the Retirement Plan
(e.g., participant account fees), provided that the Retirement Plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan(sm) or another similar
recordkeeping system made available by the Shareholder Servicing Agent. The CDSC
on Class B shares will be waived upon the transfer of registration from shares
held by a Retirement Plan through a single account maintained by the Shareholder
Servicing Agent to multiple Class B share accounts maintained by the Shareholder
Servicing Agent on behalf of individual participants in the Retirement Plan,
<PAGE> 83
provided that the Retirement Plan's sponsor subscribes to the MFS Fundamental
401(k) Plan(sm) or another similar recordkeeping system made available by the
Shareholder Servicing Agent. The CDSC on Class B shares may also be waived in
connection with the acquisition or liquidation of the assets of other investment
companies or personal holding companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund will convert to
Class A shares of the Fund approximately eight years after the purchase date.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Distribution Plan applicable to
Class B shares. However, for purposes of conversion to Class A shares, all
shares in a shareholder's account that were purchased through the reinvestment
of dividends and distributions paid in respect of Class B shares (and which have
not converted to Class A shares as provided in the following sentence) will be
held in a separate sub-account. Each time any Class B shares in the
shareholder's account (other than those in the sub-account) convert to Class A
shares, a portion of the Class B shares then in the sub-account will also
convert to Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends and
distributions that are converting to Class A shares bear to the shareholder's
total Class B shares not acquired through such reinvestment. The conversion of
Class B shares to Class A shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversion will not constitute a taxable event for Federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B shares to Class A shares will not occur if such ruling or
opinion is not available. In such event, Class B shares would continue to be
subject to higher expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge or a CDSC. 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
$5,000,000 per transaction.
Class C Shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar 401(a) or 403(b) record keeping program made available by the
Shareholder Servicing Agent.
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account. There are also other limited exceptions to these minimums for
certain tax-deferred retirement programs. Any minimums may be changed at any
time at the discretion of MFD. The Fund reserves the right to cease offering its
shares at any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the automatic investment plan) or other shareholder services, MFD or its
affiliates may either (i) give a gift of nominal value, such as a hand- held
calculator, or (ii) make a nominal charitable contribution on their behalf.
A shareholder whose shares are held in the name of, or controlled by, an
investment dealer might not receive many of the privileges and services from the
Fund (such as Right of Accumulation, Letter of Intent and certain recordkeeping
services) that the Fund ordinarily provides.
Purchases and exchanges should be made for investment purposes only. The Fund
and MFD each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or MFD may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
<PAGE> 84
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by MFD) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and MFD to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds which may include the Fund and which may change from time to
time. The Fund and MFD each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A, Class B shares and Class C
shares. In some instances, promotional incentives to dealers may be offered only
to certain dealers who have sold or may sell significant amounts of Fund Shares.
From time to time, MFD may pay dealers 100% of the applicable sales charge on
sales of Class A shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, MFD or its affiliates may, from
time to time, pay dealers an additional commission equal to 0.50% of the net
asset value of all of the Class B shares of certain specified MFS Funds sold by
such dealer during a specified sales period. In addition, from time to time MFD,
at its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of the Fund. The staff
of the SEC has indicated that dealers who receive more than 90% of the sales
charge may be considered underwriters. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives and members of their families or other invited guests
to various locations for such seminars or training programs, seminars for the
public, advertising and sales campaigns regarding one or more MFS Funds, and/or
other dealer-sponsored events. In some instances, these concessions may be
offered to dealers or only to certain dealers who have sold or may sell, during
specified periods, certain minimum amounts of shares of the Fund. From time to
time, MFD may make expense reimbursements for special training of a dealer's
registered representatives in group meetings or to help pay the expenses of
sales contests. Other concessions will not be offered to the extent prohibited
by the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. (the "NASD").
The Glass-Steagall Act prohibits national banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of the
prohibition has not been clearly defined, MFD believes that such Act should not
preclude banks from entering into agency agreements with MFD (as described
above). If, however, a bank were prohibited from so acting, the Trustees would
consider what actions, if any, would be necessary to continue to provide
efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequences as a result of
these occurrences. In addition, state securities laws on this issue may differ
from the interpretation of federal law expressed herein and banks and financial
institutions may be required to register as broker-dealers pursuant to state
law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds (if available for sale) at net asset value. In addition, Class C
shares may be exchanged for shares of MFS Money Market Fund at net asset value.
Shares of one class may not be exchanged for shares of any other class.
Exchanges will be made only after instructions in writing or by telephone (an
"Exchange Request") are received for an established account by the Shareholder
Servicing Agent in proper form (i.e., if in writing - signed by the record
owner(s) exactly as the shares are registered; if by telephone - proper account
identification is given by the dealer or shareholder of record); and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by MFS Service Center, Inc.) or all the
shares in the account. If the Exchange Request is received by the Shareholder
<PAGE> 85
Servicing Agent on any business day prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all the requirements
set forth above have been complied with at that time. No more than five
exchanges may be made in any one Exchange Request by telephone. Additional
information concerning this exchange privilege and prospectuses for any of the
other MFS Funds may be obtained from investment dealers or the Shareholder
Servicing Agent. A shareholder should read the prospectus of the other MFS Fund
and consider the differences in objectives and policies before making any
exchange. For federal and (generally) state income tax purposes, an exchange is
treated as a sale of the shares exchanged and, therefore, an exchange could
result in a gain or loss to the shareholder making the exchange. Exchanges by
telephone are automatically available to most non-retirement plan accounts and
certain retirement plan accounts. For further information regarding exchanges by
telephone see "Redemptions By Telephone." The exchange privilege (or any aspect
of it) may be changed or discontinued and is subject to certain limitations,
including certain restrictions on purchases by market timers. Special
procedures, privileges and restrictions with respect to exchanges may apply to
market timers who enter into an agreement with MFD, as set forth in such
agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuate,
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 (except, in certain cases,
redemptions of shares made by check, see below) or repurchase will normally be
available within seven days, except that 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 15 days from the
purchase date in an effort to assure that such check has cleared. Payment of
redemption proceeds may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption, or letter of instruction, together with his share
certificates (if any were issued) all in "good order" for transfer. "Good
order" generally means that the stock power, written request for redemption,
letter of instruction or certificate must be endorsed by the record owner(s)
exactly as the shares are registered and the signature(s) must be guaranteed in
the manner set forth below under the caption "Signature Guarantee." In addition,
in some cases, "good order" may require the furnishing of additional documents.
The Shareholder Servicing Agent may make certain de minimis exceptions to the
above requirements for redemption. Within seven days after receipt of a
redemption request by the Shareholder Servicing Agent in "good order," 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.
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee". The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
<PAGE> 86
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
their net asset value through his securities dealer (a repurchase), the
shareholder can place a repurchase order with his dealer, who may charge the
shareholder a fee. IF THE DEALER RECEIVES THE SHAREHOLDER'S ORDER PRIOR TO THE
CLOSE OF REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD ON THE SAME
DAY BEFORE MFD CLOSES FOR BUSINESS, THE SHAREHOLDER WILL RECEIVE THE NET ASSET
VALUE CALCULATED ON THAT DAY.
D. REDEMPTION BY CHECK -- Only Class A and Class C shares may be redeemed by
check. A shareholder owning Class A or Class C 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 or Class C shares from his or her account by
check. The Bank will provide each Class A and Class C shareholder, upon request,
with forms of checks drawn on the Bank. Only shareholders having accounts in
which no share certificates have been issued will be permitted to redeem shares
by check. Checks may be made payable in any amount not less than $500.
Shareholders wishing to avail themselves of this redemption by check privilege
should so request on their Account Application, must execute signature cards
(for additional information, see the Account Application) with signature
guaranteed in the manner set forth under the caption "Signature Guarantee," and
must return any Class A share certificates issued to them. Additional
documentation will be required from corporations, partnerships, fiduciaries or
other such institutional investors. All checks must be signed by the
shareholder(s) of record exactly as the account is registered before the Bank
will honor them. The shareholders of joint accounts may authorize each
shareholder to redeem by check. The check may not draw on monthly dividends
which have been declared but not distributed. SHAREHOLDERS WHO PURCHASE CLASS A
OR CLASS C 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 (IN THE CASE OF CLASS A SHARES) 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 THE CLASS A OR CLASS C 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 FLUCTUATION
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.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-
time right to reinvest the redemption proceeds in the same class of shares of
any of the MFS Funds (if shares of such Fund are available for sale) at net
asset value (with a credit for any CDSC paid) within 90 days of the redemption
pursuant to the Reinstatement Privilege. If the shares credited for any CDSC
paid are then redeemed within six years of the initial purchase in the case of
Class B shares, or within 12 months for certain Class A share purchases, a CDSC
will be imposed upon redemption. Such purchases under the Reinstatement
Privilege are subject to all limitations in the Statement of Additional
Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of portfolio
securities (instead of cash). The securities so distributed would be valued at
<PAGE> 87
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 transaction, tax or other charges in converting the
securities to cash.
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts established for monthly automatic investments and certain payroll
savings programs, Automatic Exchange Plan accounts and tax-deferred retirement
plans, for which there is a lower minimum investment requirement. See
"Purchases." Shareholders will be notified that the value of their account is
less than the minimum investment requirement and allowed 60 days to make an
additional investment before the redemption is processed. No CDSC will be
imposed with respect to such involuntary redemptions.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, the Fund requires in certain instances as indicated
above that the shareholder's signature be guaranteed. In these cases the
shareholder's signature must be guaranteed by an eligible bank, broker, dealer,
credit union, national securities exchange, registered securities association,
clearing agency or savings association. Signature Guarantees shall be accepted
in accordance with policies established by the Shareholder Servicing Agent.
CONTINGENT DEFERRED SALES CHARGE -- Investments ("Direct Purchases") in Class A
and B shares will be subject to a CDSC for a period of one year (in the case of
purchases of $1 million or more of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For the 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 represented by Direct Purchases exceeds the sum
of the six calendar year aggregations (12 months in the case of purchases of $1
million or more of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of 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 will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except that, with respect to transfers of registration to an IRA
rollover account, the CDSC will be waived if the shares being reregistered would
have been eligible for a CDSC waiver had they been redeemed.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule"), after having concluded that there is a reasonable
likelihood that the plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the
Fund will pay MFD a distribution/service fee aggregating up to (but not
necessarily all of) 0.35% of the average daily net assets attributable to Class
<PAGE> 88
A shares annually in order that MFD may pay expenses on behalf of the Fund
related to the distribution and servicing of Class A shares. The expenses to be
paid by MFD on behalf of the Fund include a service fee to securities dealers
which enter into a sales agreement with MFD of up to 0.25% of the Fund's average
daily net assets attributable to Class A shares that are owned by investors for
whom such securities dealer is the dealer of record. This fee is intended to be
partial consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to Class A shares. MFD may from
time to time reduce the amount of the service fee paid for shares sold prior to
a certain date. Currently the service fee paid to dealers is 0.15% per annum for
shares purchased prior to May 14, 1991. MFD may also retain a distribution fee
of 0.10% per annum of the Fund's average daily net assets attributable to Class
A shares as partial consideration for services performed and expenses incurred
in the performance of MFD's obligations under its distribution agreement with
the Fund. In addition, to the extent that the aggregate of the foregoing fees
does not exceed 0.35% per annum of the average daily net assets of the Fund
attributable to Class A shares, the Fund is permitted to pay other
distribution-related expenses, including commissions to dealers and payments to
wholesalers employed by MFD for sales at or above a certain dollar level. Fees
payable under the Class A Distribution Plan are charged to, and therefore
reduce, income allocated to Class A shares. Service fees may be reduced for a
securities dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having 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 shall be entitled to receive any
service fee payable under the Class A Distribution Plan for which there is no
dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD to shareholder accounts. Certain banks and other financial
institutions that have agency agreements with MFD will receive service fees that
are the same as service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the
Fund will pay MFD a daily distribution fee payable monthly and equal on an
annual basis to 0.75% of the Fund's average daily net assets attributable to
Class B shares and will pay MFD a service fee of up to 0.25% of the Fund's
average daily net assets attributable to Class B shares (which MFD will in turn
pay to securities dealers which enter into a sales agreement with MFD and which
are the holders of record of the Fund's Class B shares). This service fee is
intended to be additional consideration for all personal services and/ or
account maintenance services rendered by the dealer with respect to Class B
shares. Fees payable under the Class B Distribution Plan are charged to, and
therefore reduce, income allocated to Class B shares. The Class B Distribution
Plan also provides that MFD will receive all CDSCs attributable to Class B
shares (see "Redemptions and Repurchases" above), which do not reduce the
distribution fee. MFD will pay commissions to dealers of 3.75% of the purchase
price of Class B shares, purchased through dealers. MFD will also advance to
dealers the first year service fee at a rate equal to 0.25% of the purchase
price of such shares and, as compensation therefor, MFD may retain the service
fee paid by the Fund with respect to such shares for the first year after
purchase. Therefore, the total amount paid to a dealer upon the sale of shares
is 4.00% of the purchase price of the shares (commission rate of 3.75% plus
service fee equal to 0.25% of the purchase price). Dealers will become eligible
for additional service fees with respect to such shares commencing in the
thirteenth month following purchase. Dealers may from time to time be required
to meet certain criteria in order to receive service fees. MFD is entitled to
retain all service fees payable under the Class B Distribution Plan with respect
to accounts 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 to shareholder accounts.
The purpose of the distribution payments to MFD under the Class B Distribution
Plan is to compensate MFD for its distribution services to the Fund. Since MFD's
compensation is not directly tied to its expenses, the amount of compensation
received by MFD during any year may be more or less than its actual expenses.
For this reason, this type of distribution fee arrangement is characterized by
the staff of the SEC as being of the "compensation" variety. However, the Fund
is not liable for any expenses incurred by MFD in excess of the amount of
compensation it receives. The expenses incurred by MFD, including commissions to
dealers, are likely to be greater than the distribution fees for the next
several years, but thereafter such expenses may be less than the amount of the
distribution fees. Certain banks and other financial institutions that have
agency agreements with MFD will receive agency transaction and service fees that
are the same as commissions and service fees to dealers.
<PAGE> 89
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the
Fund will pay MFD a distribution fee of up to 0.75% per annum of the Fund's
average daily net assets attributable to Class C shares and will pay MFD a
service fee of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class C shares (which MFD in turn pays to securities dealers
which enter into a sales agreement with MFD at a rate of up to 0.25% per annum
of the Fund's daily net assets attributable to Class C shares owned by investors
for whom that securities dealer is the holder or dealer of record). The
distribution/service fees attributable to Class C shares are designed to permit
an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares. The service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered with respect to Class C shares. MFD or its
affiliates are entitled to retain all service fees payable under the Class C
Distribution Plan with respect to accounts for which there is no dealer of
record as partial consideration for personal services and/or account maintenance
services performed by MFD or its affiliates for shareholder accounts.
The purpose of the distribution payments paid to MFD under the Class C
Distribution Plan is to compensate MFD for its distribution services to the
Fund. Distribution payments under the Plan will be used by MFD to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom that securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
of record.) MFD also pays 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 compensation of personnel and all costs of travel, office
expense and equipment. Since MFD's compensation is not directly tied to its
expenses, the amount of compensation received by MFD during any year may be more
or less than its actual expenses. For this reason, this type of distribution fee
arrangement is characterized by the staff of the SEC as being of the
"compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
and service fees paid to dealers. Fees payable under the Class C Distribution
Plan are charged to, and therefore reduce, income allocated to Class C shares.
DISTRIBUTIONS The Fund intends to pay substantially all of its net investment
income to its shareholders as dividends on a monthly basis. In determining the
net investment income available for distributions, the Fund may rely on
projections of its anticipated net investment income, including short-term
capital gains from the sales of securities or other assets and premiums from
options written, over a longer term, rather than its actual net investment
income for the period. If the Fund earns less than projected, or otherwise
distributes more than its earnings for the year, a portion of the distributions
may constitute a return of capital. Distributions from short-term capital gains,
if any, from the sale of securities or other assets, and of all or a portion of
premiums received from options (including premiums received on options written
and expected to be earned over the near term), are expected to be made monthly.
In addition, the Fund will make one or more distributions during the calendar
year from any long-term capital gains. Shareholders may elect to receive
dividends and capital gain distributions in either cash or additional shares of
the same class with respect to which a distribution is made. See "Tax Status"
and "Shareholder Services -- Distribution Options" below. Distributions paid by
the Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares because expenses attributable to
Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes although foreign-source income
received by the Fund may be subject to foreign withholding taxes.
<PAGE> 90
Shareholders of the Fund normally will have to pay federal income taxes, (and
any state or local taxes,) on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or additional shares. A portion of
the dividends received from the Fund (but none of the Fund's capital gain
distributions) may qualify for the dividends-received deduction for
corporations. A statement setting forth the Federal income tax status of all
dividends and distributions for that year, including the portion taxable as
ordinary income, the portion taxable as long-term capital gain, the portion, if
any, representing a return of capital (which is free of current taxes but
results in a basis reduction) and the amount, if any, of federal income tax
withheld will be sent to each shareholder promptly after the end of such year.
The Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and any certain other payments that are subject to such withholding
and are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable law or
treaty. The Fund is also required in certain circumstances to apply backup
withholding of 31% on dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. However, backup withholding will not
be applied to payments which have had 30% withholding taken. Prospective
shareholders should read the Account Application for information regarding
backup withholding of federal income tax and should consult their own tax
advisers as to the tax consequences of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the
Statement of Additional Information. All investments and assets are expressed in
U.S. dollars based upon current currency exchange rates. The net asset value per
share of each class of shares is effective for orders received by the dealer
prior to its calculation and received by MFD prior to the close of that business
day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of two series of the Trust, has three classes of shares, entitled
Class A, Class B and Class C Shares of Beneficial Interest (without par value).
The Fund has reserved the right to create and issue additional classes and
series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election or selection of
Trustees and accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Fund does not intend to hold annual shareholder meetings. The
Trust's Declaration of Trust provides that a Trustee may be removed from office
in certain instances (see "Description of Shares, Voting Rights and Liabilities"
in the Statement of Additional Information).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Fund is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
<PAGE> 91
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance existed (e.g., fidelity bonding and errors and omissions insurance)
and the Fund itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the Lipper
Analytical Services, Inc. and Wiesenberger Investment Companies Service. Yield
quotations are based on the annualized net investment income per share of each
class over a 30-day period stated as a percent of the maximum public offering
price of shares of that class on the last day of that period. The yield
calculation for Class B shares assumes no CDSC is paid. The current distribution
rate for each class is generally based upon the total amount of dividends per
share paid by the Fund to shareholders of that class during the past twelve
months and is computed by dividing the amount of such dividends by the maximum
public offering price of that class at the end of such period. Current
distribution rate calculations for Class B shares assume no CDSC is paid. The
current distribution rate differs from the yield calculation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing, short-term capital gains,
and return of invested capital, and is calculated over a different period of
time. Total rate of return quotations will reflect the average annual percentage
change over stated periods in the value of an investment in a class of the Fund
made at the maximum public offering price of the shares of that class with all
distributions reinvested and which, if quoted for periods of six years or less,
will give effect to the imposition of the CDSC assessed upon redemptions of the
Fund's Class B shares. Such total rate of return quotations may be accompanied
by quotations which do not reflect the reduction in value of the initial
investment due to the sales charge or the deduction of a CDSC, and which will
thus be higher. All performance quotations are based on historical performance
and are not intended to indicate future performance. Yield reflects only net
portfolio income as of a stated time and current distribution rate reflects only
the rate of distributions paid by the fund over a stated period of time, while
total rate of return reflects all components of investment return over a stated
period of time. The Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders. For
a discussion of the manner in which the Fund will calculate its yield, current
distribution rate and total rate of return, see the Statement of Additional
Information. For further information about the Fund's performance for the fiscal
year end October 31, 1994, please see the Fund's Annual Report. A copy of the
Annual Report may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number). In addition to
information provided in shareholder reports, the Fund may, in its discretion,
from time to time make a list of all or a portion of its holdings available to
investors upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions (except as provided below)
reinvested in additional shares.
-- Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time to time
make
<PAGE> 92
distributions from short-term capital gains on a monthly basis,
and to the extent such gains are distributed monthly, they shall be paid
in cash; any remaining short-term capital gains not so distributed shall
be reinvested in additional shares. Reinvestments (net of any tax
withholding) will be made in additional full and fractional shares of the
same class of shares at the net asset value in effect at the close of business
on the record date. Dividends and capital gain distributions in amounts
less than $10 will automatically be reinvested in additional shares of the
Fund. If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, 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 defined
in the Statement of Additional Information) anticipates purchasing $100,000 or
more of Class A shares of the Fund alone or in combination with Class B or C
shares of the Fund or any class of other MFS Funds or the MFS Fixed Fund (a bank
collective investment fund) within a 13-month period (or 36-month period in the
case of purchases of $1 million or more), the shareholder may obtain Class A
shares of the Fund at the same reduced sales charge as though the total quantity
were invested in one lump sum, subject to escrow agreements and the appointment
of an attorney for redemptions from the escrow amount if the intended purchases
are not completed, by completing the Letter of Intent section of the Account
Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all the holdings
of all classes of shares of that shareholder in the MFS Funds or the MFS Fixed
Fund (a bank collective investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or anyone he designates) regular periodic
payments, as designated on the Account Application and based upon the value of
his account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be
at least $100, except in certain limited circumstances. The aggregate
withdrawals of Class B shares in any year pursuant to a SWP will not be subject
to a CDSC and are generally limited to 10% of the value of the account at the
time of the establishment of the SWP. The CDSC will not be waived in the case of
SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
<PAGE> 93
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder. Under the Automatic Exchange Plan, exchanges of at least $50
each may be made to up to four different funds. A shareholder should consider
the objectives and policies of a fund and review its prospectus before electing
to exchange money into such fund through the Automatic Exchange Plan. No
transaction fee is imposed in connection with exchange transactions under the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund or Class A shares of MFS Cash Reserve Fund will
be subject to any applicable sales charge. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, could result in a capital gain or loss to the shareholder making
the exchange. See the Statement of Additional Information for further
information concerning the Automatic Exchange Plan. Investors should consult
their tax advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal program
would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class B shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax advisers before establishing any of the tax-deferred retirement plans
described above.
-------------------------
The Fund's Statement of Additional Information, dated March 1, 1995, contains
more detailed information about the Fund, including information related to (i)
the Fund's investment policies and restrictions, including the purchase and sale
of options, Futures Contracts, Options on Futures Contracts, Forward Contracts
and Options on Foreign Currencies; (ii) the Trustees, officers and investment
adviser; (iii) portfolio trading; (iv) the shares, including rights and
liabilities of shareholders; (v) tax status of dividends and distributions; (vi)
the Distribution Plans; and (vii) various services and privileges provided by
the Fund for the benefit of its shareholders, including additional information
with respect to the exchange privilege.
<PAGE> 94
APPENDIX A
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
Federal Farm Credit Banks Consolidated Systemwide Notes and Bonds -- are bonds
issued and guaranteed by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration.
Maritime Administration Bonds -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA Debentures -- are debentures issued by the Federal Housing Administration of
the U.S. Government.
GNMA Certificates -- are mortgage-backed securities which represent partial
ownership interests in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the
Federal Housing Administration or the Veterans Administration or the Farmers
Home Administration.
The Fund will purchase GNMA Certificates of the "modified pass-through"
type, which entitle the holder to receive its proportionate share of all
interest and principal payments owed on the mortgage pool, net of fees paid to
the issuer and GNMA. Payment of principal of and interest on GNMA Certificates
of the "modified pass-through" type is guaranteed by GNMA.
FHLMC Bonds -- are bonds issued and guaranteed by the Federal Home Loan Mortgage
Corporation and are not guaranteed by the U.S. Government.
FNMA Bonds -- are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds -- are notes and bonds issued by the
Federal Home Loan Bank System.
SLMA Debentures -- are debentures backed by the Student Loan Marketing
Association and are not guaranteed by the U.S. Government.
The list of securities set forth above does not purport to be an
exhaustive compilation of all debt obligations issued or guaranteed by U.S.
Government agencies, authorities or instrumentalities. The Fund reserves the
right to invest in debt obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities in addition to those listed above.
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's S&P, and Fitch represent their opinions as to the quality
of various bonds. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS ARE NOT
ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, BONDS WITH THE SAME MATURITY,
COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE BONDS OF THE SAME MATURITY AND
COUPON WITH DIFFERENT RATINGS MAY HAVE THE SAME YIELD.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
<PAGE> 95
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong. AA: Debt rated
'AA' has a very strong capacity to pay interest and repay principal and differs
from the higher rated issues only in small degree.
A: Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC AND C: Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
<PAGE> 96
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
BB: Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B: Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC: The rating 'CC' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC' rating.
C: The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D: Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories. NR: Indicates that no public rating has been requested, that
there is insufficient information on which to base a rating, or that S&P does
not rate a particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
<PAGE> 97
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rated category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence
that is likely to result in a rating change and the likely direction of such
change. These are designated a "Positive", indicating a potential upgrade,
"Negative", for potential downgrade, or "Evolving", where ratings may be
lowered, FitchAlert is relatively short-term, and should be resolved within 12
months.
<PAGE> 98
APPENDIX C
PORTFOLIO COMPOSITION CHART
FOR FISCAL YEAR ENDED OCTOBER 31, 1994
The table below shows the percentages of the Fund's assets at October 31, 1994
invested in securities assigned to the various rating categories by S&P, Moody's
(provided only for securities not rated by S&P) and Fitch (provided only for
securities not rated by S&P or Moody's) and in unrated securities determined by
MFS to be of comparable quality:
<TABLE>
<CAPTION>
UNRATED
SECURITIES OF
COMPARABLE
RATING S&P MOODY'S FITCH QUALITY TOTAL
- ------ ----- ------- ----- ------------- -----
<S> <C> <C> <C> <C>
AAA/Aaa............... 10.1% 10.1%
AA/Aa................. 8.4% 8.4%
A/A................... 3.9% 3.9%
BBB/Baa............... 3.5% 3.5%
BB/Ba................. 21.3% 21.3%
B/B................... 28.3% 0.4% 2.6% 31.3%
CCC/Caa............... 1.9% 0.4% 2.3%
CCC/Ca................ 0.3% 0.3%
C/C...................
Default............... 1.8% 1.8%
Total................. 77.7% 0.4% 4.8% 82.9%
</TABLE>
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
<PAGE> 99
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
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) STRATEGIC INCOME FUND
500 Boylston Street
Boston, MA 02116
MSI-1 3/95 39M 34/234
MFS
THE FIRST NAME IN MUTUAL FUNDS
MFS STRATEGIC INCOME FUND
Prospectus
March 1, 1995
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MFS STRATEGIC INCOME FUND
(A SERIES OF MFS SERIES TRUST VIII)
SUPPLEMENT TO BE AFFIXED TO CURRENT
PROSPECTUS FOR DISTRIBUTION IN ARIZONA
The Fund invests primarily in high yield, high risk securities and therefore
may not be suitable for all investors.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1995.
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MFS STRATEGIC INCOME FUND
(A SERIES OF MFS SERIES TRUST VIII)
SUPPLEMENT TO BE AFFIXED TO CURRENT
PROSPECTUS FOR DISTRIBUTION IN WASHINGTON
The Fund invests significantly in securities (commonly known as "junk bonds")
which are ordinarily in the lower rating categories of recognized rating
agencies or are unrated and generally involve greater volatility of price and
risk of loss of principal and interest income than securities in the higher
rating categories (see "Risk Factors"). An investment in shares of the Fund
should not be considered to constitute a complete investment program and
investors should carefully assess the risks associated with an investment in
this Fund.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1995.
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MFS STRATEGIC INCOME FUND
(A SERIES OF MFS SERIES TRUST VIII)
SUPPLEMENT TO BE AFFIXED TO CURRENT
PROSPECTUS FOR DISTRIBUTION IN MISSOURI
As stated in the Prospectus, under "Management of the Fund Investment
Adviser," for its services and facilities, the Adviser receives an annual
management fee computed and paid monthly, in an amount equal to the sum of
0.50% of the average daily net assets of the fund plus 7.14% of the gross
income of the Fund for the then-current fiscal year. Effective June 1, 1993,
the Adviser has voluntarily reduced its right to receive the fee set forth in
the Advisory Agreement to a maximum of 0.75% of the average daily net assets of
the Fund. The temporary reduction may be rescinded at any time by the Adviser
without notice to the shareholders.
THE DATE OF THIS SUPPLEMENT IS MARCH 1, 1995.
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THE FIRST NAME IN MUTUAL FUNDS
MFS(R) STRATEGIC STATEMENT OF
INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) March 1, 1995
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1. Definitions ........................................................... 2
2. Investment Objective, Policies and Restrictions ....................... 2
3. Management of the Fund ................................................ 13
Trustees ........................................................... 13
Officers ........................................................... 14
Investment Adviser ................................................. 14
Custodian .......................................................... 15
Shareholder Servicing Agent ........................................ 15
Distributor ........................................................ 15
4. Portfolio Transactions and Brokerage Commissions ...................... 16
5. Shareholder Services .................................................. 17
Investment and Withdrawal Programs ................................. 17
Exchange Privilege ................................................. 19
Tax-Deferred Retirement Plans ...................................... 20
6. Tax Status ............................................................ 20
7. Distribution Plans .................................................... 21
8. Determination of Net Asset Value and Performance ...................... 23
9. Description of Shares, Voting Rights and Liabilities .................. 25
10. Independent Accountants and Financial Statements ...................... 26
MFS STRATEGIC INCOME FUND
A Series of MFS Series Trust VIII
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus dated March 1, 1995. This Statement of Additional Information 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 STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
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<TABLE>
<S> <C>
1. DEFINITIONS "Fund" -- MFS(R) Strategic Income Fund, a non-
diversified series of MFS Series Trust VIII
(the "Trust"), a Massachusetts business
trust. On May 16, 1994, the Fund's name was
changed from MFS Income & Opportunity Fund
to MFS Strategic Income Fund. Prior to
August 27, 1993, the Fund was a single
series Trust known as MFS Income and
Opportunity Fund, (MFS Income & Opportunity
Trust prior to August 3, 1992).
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus, dated March 1, 1995, of the
Fund.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE AND POLICIES. The investment objective and policies of the
Fund are described in the Prospectus and below. The following discussion of the
Fund's investment policies and restrictions supplements and should be read in
conjunction with the information set forth in the "Investment Objective and
Policies" section of the Prospectus.
NON-DIVERSIFIED INVESTMENT COMPANY: The Fund has registered as a "non-
diversified" investment company so that it is limited as to the percentage of
its assets which may be invested in the securities of any one issuer only by its
own investment restrictions and the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. U.S. Government Securities, which are
generally considered free of credit risk and are assured as to payment of
principal and interest if held to maturity, are not subject to any investment
limitation. The portfolio will be managed actively and the asset allocations
modified as the Adviser deems necessary.
FOREIGN SECURITIES: The Fund may invest up to 50% (and expects generally to
invest between 25% and 50%) of its total assets in foreign securities (not
including American Depositary Receipts). Investments in foreign issues involve
considerations and possible risks not typically associated with investments in
securities issued by domestic companies or with debt securities issued by
foreign governments. There may be less publicly available information about a
foreign company than about a domestic company, and many foreign companies are
not subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. Foreign
securities markets, while growing in volume, have substantially less volume than
U.S. markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. Fixed
brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. There is also less
government supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States.
AMERICAN DEPOSITARY RECEIPTS: American Depositary Receipts ("ADRs") are
certificates issued by a U.S. depository (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depository which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. 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
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foreign securities are denominated in foreign currency.
NON-DOLLAR FIXED INCOME SECURITIES: The Fund will purchase non-dollar fixed
income securities denominated in the currency of countries where the interest
rate environment as well as the general economic climate are believed by the
Adviser to provide an opportunity for declining interest rates and currency
appreciation. If interest rates decline, such non-dollar fixed income securities
will appreciate in value. If the currency also appreciates against the dollar,
the total investment in such non-dollar fixed income securities would be
enhanced further. (For example, if United Kingdom bonds yield 14% during a year
when interest rates decline causing the bonds to appreciate by 5% and the pound
rises 3% versus the dollar, then the annual total return of such bonds would be
22%. This example is illustrative only.) Conversely, a rise in interest rates or
decline in currency exchange rates would adversely affect the Fund's return.
Investments in non-dollar fixed income securities are evaluated primarily on the
strength of a particular currency against the dollar and on the interest rate
climate of that country. Currency is judged on the basis of fundamental economic
criteria (e.g., relative inflation levels and trends, growth rate forecasts,
balance of payments status, and economic policies) as well as technical and
political data. In addition to the foregoing, interest rates are evaluated on
the basis of differentials or anomalies that may exist between different
countries.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-
backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related 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.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by the Government National Mortgage Association, the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation, but
may also be collateralized by whole loans or private mortgage pass-through
securities (such collateral collectively hereinafter referred to "Mortgage
Assets"). The Fund may also invest a portion of its assets in multiclass
pass-through securities which are interests in a trust composed of Mortgage
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Assets. The Fund may invest in CMOs and multiclass pass-through securities which
are issued by the U.S. Government, its agencies, authorities or
instrumentalities or private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Unless the
context indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities.
In a common CMO structure, a series of bonds or certificates is usually issued
in multiple classes with different maturities. Each class of CMOs, often
referred to as a "tranche", is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the Mortgage Assets may cause the CMOs to be retired substantially earlier
than their stated maturities or final distribution dates resulting in a loss of
all or part of the premium if any has been paid. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly or semiannual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways. In a common structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of the series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS") which are derivative multiclass
mortgage securities issued by agencies of or instrumentalities of the U.S.
Government, or by private originators of, or investors in mortgage loans,
including savings and loan institutions, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest while the other class will
receive all of the principal. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities. The market value of the class
consisting primarily or entirely of principal payments generally is unusually
volatile in response to changes in interest rates. Because SMBS were only
recently introduced, established trading markets for these securities have not
yet developed, although the securities are traded among institutional investors
and investment banking firms.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange (the "Exchange"), members of the Federal Reserve System, recognized
primary U.S. Government securities dealers or institutions which the Adviser has
determined to be of comparable creditworthiness. The securities that the Fund
purchases and holds through its agent are U.S. Government Securities, the values
of which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a standard rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the U.S. Government Securities.
The repurchase agreement provides that in the event the seller fails to pay the
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price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loan
participations and other direct claims against a borrower. In purchasing a loan
participation, the Fund acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at the
time of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrower's obligation, or that
the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loan participations acquired by the Fund may involve revolving
credit facilities or other standby financing commitments which obligate the Fund
to pay additional cash on a certain date or on demand. These commitments may
have the effect of requiring the Fund to increase its investment in a company at
a time when the Fund might not otherwise decide to do so (including at a time
when the company's financial condition makes it unlikely that such amounts will
be repaid). To the extent that the Fund is committed to advance additional
funds, it will at all times hold and maintain in a segregated account cash or
other high grade debt obligations in an amount sufficient to meet such
commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other direct
investments which the Fund will purchase, the Adviser will rely upon its (and
not that of the original lending institution's) own credit analysis of the
borrower. As the Fund may be required to rely upon another lending institution
to collect and pass on to the Fund amounts payable with respect to the loan and
to enforce the Fund's rights under the loan, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Fund from
receiving such amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the borrower and
the lending institution as an "issuer" of the loan participation for purposes of
certain investment restrictions pertaining to the diversification of the Fund's
portfolio investments. The highly leveraged nature of many such loans may make
such loans especially vulnerable to adverse changes in economic or market
conditions. Investments in such loans may involve additional risks to the Fund.
For example, if a loan is foreclosed, the Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Fund could be held liable as a
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co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Fund. In addition, loan participations and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
To the extent that the Adviser determines that any such investments are
illiquid, the Fund will include them in the investment limitations described
below.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities ("Options") and purchase call and put Options. An Option provides the
purchaser, or "holder," with the right, but not the obligation, to purchase, in
the case of a "call" Option, or sell, in the case of a "put" Option, the
security or securities in connection with which the Option was written, for a
fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. The holder pays a non-refundable purchase price for the
Option, known as the "premium." The maximum amount of risk the purchaser of the
Option assumes is equal to the premium plus related transaction costs, although
this entire amount may be lost. The risk of the seller, or "writer," however, is
potentially unlimited, unless the Option is "covered." A call option written by
the Fund is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash, short-term money market
instruments or high quality government securities in a segregated account with
its custodian. A put option written by the Fund is "covered" if the Fund
maintains cash, short-term money market instruments or high quality government
securities with a value equal to the exercise price in a segregated account with
its custodian, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held is
(a) equal to or greater than the exercise price of the put written or (b) is
less than the exercise price of the put written if the difference is maintained
by the Fund in cash or short-term money market instruments in a segregated
account with its custodian. Put and call options written by the Fund may also be
covered in such other manner as may be in accordance with the requirements of
the exchange on which, or the counter party with which the option is traded, and
applicable laws and regulations. If the writer's obligation is not so covered,
it is subject to the risk of the full change in value of the underlying security
from the time the option is written until exercise.
The Fund may write Options for the purpose of increasing its return and for
hedging purposes. In particular, if the Fund writes an Option which expires
unexercised or is closed out by the Fund at a profit, the Fund retains the
premium paid for the Option less related transaction costs, which increases its
gross income and offsets in part the reduced value of the portfolio security in
connection with which the Option is written, or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the Option moves adversely to the Fund's position, the Option may be
exercised and the Fund will then be required to purchase or sell the security at
a disadvantageous price, which might only partially be offset by the amount of
the premium.
The Fund may write Options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call Option against that
security. The exercise price of the call Option the Fund determines to write
depends upon the expected price movement of the underlying security. The
exercise price of a call Option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the Option is written.
The writing of covered put Options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put Options may be used by the
Fund in the same market environments in which call Options are used in
equivalent buy-and-write transactions.
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In certain instances, the Fund may enter into Options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of each
such Option. Like other types of Options, these transactions, which may be
referred to as "reset" Options or "adjustable strike Options," grant the
purchaser the right to purchase (in the case of a "call") or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of Options, however, the price at which the underlying
security may be purchased or sold under a "reset" Option is determined at
various intervals during the term of the Option, and such price fluctuates from
interval to interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" Option, at the time of
exercise, may be less advantageous to the Fund than if the strike price had been
fixed at the initiation of the Option. In addition, the premium paid for the
purchase of the Option may be determined at the termination, rather than the
initiation, of the Option. If the premium is paid at termination, the Fund
assumes the risk that (i) the premium may be less than the premium which would
otherwise have been received at the initiation of the Option because of such
factors as the volatility in yield of the underlying U.S. Treasury security over
the term of the Option and adjustments made to the strike price of the Option,
and (ii) the Option purchaser may default on its obligation to pay the premium
at the termination of the Option.
The Fund may also write combinations of put and call Options on the same
security, a practice known as a "straddle." By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the Options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset, however, in whole or in part, by the premiums received
on the writing of the two Options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The writing
of straddles will likely be effective, therefore, only where the price of a
security remains stable and neither the call nor the put is exercised. In an
instance where one of the Options is exercised, the loss on the purchase or sale
of the underlying security may exceed the amount of the premiums received.
By writing a call Option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the Option. By writing a put Option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing of
Options will not be undertaken by the Fund solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where Options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call Options. Put Options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put Options will permit the Fund to sell the
securities underlying such Options at the exercise price, or to close out the
Options at a profit. The Fund will purchase call Options to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. If such an increase occurs, the call Option will permit the Fund to
purchase the securities underlying such Option at the exercise price or to close
out the Option at a profit. The premium paid for a call or put Option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise of the Option, and, unless the price of the underlying security rises
or declines sufficiently, the Option may expire worthless to the Fund. In
addition, in the event that the price of the security in connection with which
an Option was purchased moves in a direction favorable to the Fund, the benefits
realized by the Fund as a result of such favorable movement will be reduced by
the amount of the premium paid for the Option and related transaction costs.
The staff of the Securities and Exchange Commission (the "SEC") has taken the
position that purchased over-the-counter Options and assets used to cover
written over-the-counter Options are illiquid and, therefore, together with
other illiquid securities, cannot exceed a certain percentage of the Fund's
assets (the "SEC illiquidity ceiling"). Although the Adviser disagrees with
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this position, the Adviser intends to limit the Fund's writing of over-the-
counter Options in accordance with the following procedure. Except as provided
below, the Fund intends to write over-the-counter Options only with primary
U.S. Government securities dealers recognized by the Federal Reserve Bank of
New York. Also, the contracts the Fund has in place with such primary dealers
will provide that the Fund has the absolute right to repurchase an Option it
writes at any time at a price which represents the fair market value, as
determined in good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula in the contract.
Although the specific formula may vary between contracts with different
primary dealers, the formula will generally be based on a multiple of the
premium received by the Fund for writing the Option, plus the amount, if any,
of the Option's intrinsic value (i.e., the amount that the Option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the
Option if the Option is written out-of-the-money. The Fund will treat all or a
portion of the formula as illiquid for purposes of the SEC illiquidity
ceiling. The Fund may also write over-the-counter Options with non-primary
dealers, including foreign dealers, and will treat the assets used to cover
these Options as illiquid for purposes of such illiquidity ceiling.
YIELD CURVE OPTIONS: The Fund may also enter into Options on the "spread," or
yield differential between two securities, in transactions referred to as "yield
curve" Options. In contrast to other types of Options, a yield curve Option is
based on the difference between the yields of designated securities, rather than
the prices of the individual securities, and is settled through cash payments.
Accordingly, a yield curve Option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve Options may be used for the same purposes as other Options on
securities. Specifically, the Fund may purchase or write such Options for
hedging purposes. For example, the Fund may purchase a call Option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The Fund may also purchase or write
yield curve Options for other than hedging purposes (i.e., in an effort to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve Options is subject to all of
the risks associated with the trading of other types of Options. In addition,
however, such Options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated. Yield curve Options written by the Fund
will be "covered." A call (or put) Option is covered if the Fund holds another
call (or put) Option on the spread between the same two securities and maintains
in a segregated account with its custodian cash or cash equivalents sufficient
to cover the Fund's net liability under the two Options. Therefore, the Fund's
liability for such a covered Option is generally limited to the difference
between the amount of the Fund's liability under the Option written by the Fund
less the value of the Option held by the Fund. Yield curve Options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the Option is traded and applicable laws and
regulations. Yield curve Options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed.
OPTIONS ON STOCK INDICES: As noted in the Prospectus, the Fund may write (sell)
covered call and put Options and purchase call and put Options on stock indices.
The Fund may cover call Options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio. Where the Fund
covers a call Option on a stock index through ownership of securities, such
securities may not match the composition of the index and, in that event, the
Fund will not be fully covered and could be subject to risk of loss in the event
of adverse changes in the value of the index. The Fund may also cover call
Options on stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
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maintained by the Fund in cash or cash equivalents in a segregated account with
its custodian. The Fund may cover put Options on stock indices by maintaining
cash or cash equivalents with a value equal to the exercise price in a
segregated account with its custodian, or else by holding a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held (a) is equal to or greater than the exercise price of the
put written or (b) is less than the exercise price of the put written if the
difference is maintained by the Fund in cash or cash equivalents in a segregated
account with its custodian. Put and call Options on stock indices may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which, or the counterparty with which, the Option is traded and
applicable laws and regulations.
The Fund will receive a premium from writing a put or call Option, which
increases the Fund's gross income in the event the Option expires unexercised or
is closed out at a profit. If the value of an index on which the Fund has
written a call Option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
Option position, which will reduce the benefit of any unrealized appreciation in
the Fund's stock investments. By writing a put Option, the Fund assumes the risk
of a decline in the index. To the extent that the price changes of securities
owned by the Fund correlate with changes in the value of the index, writing
covered put Options on indexes will increase the Fund's losses in the event of a
market decline, although such losses will be offset in part by the premium
received for writing the Option.
The Fund may also purchase put Options on stock indices to hedge its investments
against a decline in value. By purchasing a put Option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put Option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the Option does not increase, the
Fund's loss will be limited to the premium paid for the Option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings. The purchase of call Options
on stock indices may be used by the Fund to attempt to reduce the risk of
missing a broad market advance, or an advance in an industry or market segment,
at a time when the Fund holds uninvested cash or short-term debt securities
awaiting investment. When purchasing call Options for this purpose, the Fund
will also bear the risk of losing all or a portion of the premium paid if the
value of the index does not rise. The purchase of call Options on stock indices
when the Fund is substantially fully invested is a form of leverage, up to the
amount of the premium and related transaction costs, and involves risks of loss
and of increased volatility similar to those involved in purchasing calls on
securities the Fund owns.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or contracts based on municipal
bond or other financial indices, including any index of U.S. or foreign
government securities as such instruments become available for trading ("Futures
Contracts"). A "sale" of a Futures Contract means a contractual obligation to
deliver the securities called for by the contract at a specified price in a
fixed delivery month or, in the case of a Futures Contract on an index of
securities, to make or receive a cash settlement. A "purchase" of a Futures
Contract means a contractual obligation to acquire the securities called for by
the contract at a specified price in a fixed delivery month or, in the case of a
Futures Contract on an index of securities, to make or receive a cash
settlement. U.S. Futures Contracts have been designed by exchanges which have
been designated as "contract markets" by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
Existing contract markets include the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange. Futures
Contracts are traded on these markets, and, through their clearing corporations,
the exchanges guarantee performance of the contracts as between the clearing
members of the exchange. The Fund will enter into Futures Contracts which are
based on debt securities that are backed by the full faith and credit of the
U.S. Government, such as long-term U.S. Treasury Bonds, Treasury Notes, and
three-month U.S. Treasury Bills. The Fund may also enter into Futures Contracts
which are based on corporate securities, non-U.S. Government bonds and
Eurodollar deposits.
<PAGE> 112
At the same time a Futures Contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The initial deposit
varies but may be as low as 5% or less of the value of the contract. Daily
thereafter, the Futures Contract is valued and the payment of "variation margin"
may be required since each day the Fund would provide or receive cash that
reflects any decline or increase in the contract's value. At the time of
delivery of securities pursuant to a Futures Contract based on fixed income
securities, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a Futures
Contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction cancels the
obligation to make or take delivery of the securities. Since all transactions in
the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the Fund will
incur brokerage fees when it purchases or sells futures contracts.
The purpose of the purchase or sale of a Futures Contract, in the case of a
portfolio, such as the portfolio of the Fund, holding long-term debt securities,
is to protect the Fund from fluctuations in interest rates without actually
buying or selling long-term debt securities. For example, if the Fund owned
long-term bonds and interest rates were expected to increase, the Fund might
enter into Futures Contracts for the sale of debt securities. If interest rates
did increase, the value of the debt securities in the portfolio would decline,
but the value of the Fund's Futures Contracts should increase at approximately
the same rate, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have. The Fund could accomplish similar results by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase or by buying bonds with long
maturities and selling bonds with short maturities when interest rates are
expected to decline. However, since the futures market is more liquid than the
cash market, the use of Futures Contracts as an investment technique allows the
Fund to maintain a defensive position without having to sell its portfolio
securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Fund could have the effect of diluting
dividend earnings. To the extent the Fund enters into Futures Contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of cash,
cash equivalents or short-term money market instruments from the portfolio of
the Fund in an amount equal to the difference between the fluctuating market
value of such Futures Contracts and the aggregate value of the initial and
variation margin payments made by the Fund with respect to such Futures
Contracts, thereby assuring that the transactions are unleveraged.
Also, the Fund may purchase or sell stock index Futures Contracts to attempt to
protect current or intended stock investments from broad fluctuations in stock
prices. For example, the Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual market
conditions a long futures position may be terminated without a related purchase
<PAGE> 113
of securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close Futures Contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, Futures Contracts entail risks. Although the Fund believes that use
of such contracts will benefit the Fund, if the Adviser's investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell bonds from
its portfolio to meet daily variation margin requirements. Such sales of bonds
may, but will not necessarily, be at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts") for hedging purposes.
The Fund may also enter into transactions in Options on Futures Contracts for
non-hedging purposes to the extent permitted by applicable law. The purchase of
a call Option on a Futures Contract is similar in some respects to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the price of the Futures Contract upon which it is
based or the price of the underlying debt securities, it may or may not be less
risky than ownership of the Futures Contract or underlying debt securities. As
with the purchase of Futures Contracts, when the Fund is not fully invested it
may purchase a call Option on a Futures Contract to hedge against a market
advance due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the security underlying the Futures Contract. If the
futures price at expiration of the option is below the exercise price, the Fund
will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put Option on a Futures
Contract constitutes a partial hedge against increasing prices of the security
underlying the Futures Contract. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a partial
hedge against any increase in the price of securities which the Fund intends to
purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing Options on Futures Contracts may to some extent be
reduced or increased by changes in the value of portfolio securities.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, a rise in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the Fund may, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease in portfolio value occurs,
it may be offset, in whole or part, by a profit on the option. Conversely, where
it is projected that the value of securities to be acquired by the Fund will
<PAGE> 114
increase prior to acquisition, due to a market advance, or a decline in interest
rates or a rise in the dollar value of foreign currencies in which securities to
be acquired are denominated, the Fund may purchase call Options on Futures
Contracts, rather than purchasing the underlying Futures Contracts. As in the
case of Options, the writing of Options on Futures Contracts may require the
Fund to forego all or a portion of the benefits of favorable movements in the
price of portfolio securities, and the purchase of Options on Futures Contracts
may require the Fund to forego all or a portion of such benefits up to the
amount of the premium paid and related transaction costs.
The amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased.
The Fund's ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments. It
is impossible to predict the amount of trading interest that may exist in
various types of options or futures. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. Furthermore, the Fund's ability to engage in options and
futures transactions may be limited by tax considerations.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or high
quality government securities in a segregated account with its custodian. The
Fund may cover the writing of put Options on Futures Contracts (a) through sales
of the underlying Futures Contract, (b) through segregation of cash, short-term
money market instruments or high quality government securities in an amount
equal to the value of the security or index underlying the Futures Contract, or
(c) through the holding of a put on the same Futures Contract and in the same
principal amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written, or is less than
the exercise price of the put written if the difference is maintained by the
Fund in cash, short-term money market instruments or high quality government
securities in a segregated account with its custodian. Put and call Options on
Futures Contracts may also be covered in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Upon the exercise of a call Option on a Futures
Contract written by the Fund, the Fund will be required to sell the underlying
Futures Contract which, if the Fund has covered its obligation through the
purchase of such Contract, will serve to liquidate its futures position.
Similarly, where a put Option on a Futures Contract written by the Fund is
exercised, the Fund will be required to purchase the underlying Futures Contract
which, if the Fund has covered its obligation through the sale of such Contract,
will close out its futures position. An Option on a Futures Contract is traded
on the same contract market as the underlying Futures Contact, subject to
regulation by the CFTC and the performance guarantee of the exchange clearing
house. Options on Futures Contracts, as noted in the Prospectus, are also traded
on foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may also
enter into Forward Contracts for "cross-hedging" as noted in the Prospectus. The
Fund may enter into Forward Contracts for hedging purposes as well as for
non-hedging purposes. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of fixed income securities denominated in
a foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. By entering into such transactions, however, the
Fund may be required to forego the benefits of advantageous changes in exchange
rates. The Fund may also enter into transactions in Forward Contracts for other
than hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Fund may purchase or sell such currency, respectively,
<PAGE> 115
through a Forward Contract. If the expected changes in the value of the currency
occur, the Fund will realize profits which will increase its gross income. Where
exchange rates do not move in the direction or to the extent anticipated,
however, the Fund may sustain losses which will reduce its gross income. Such
transactions, therefore, could be considered speculative.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority to
regulate Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options would be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options, which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for hedging purposes in a
manner similar to the way Forward Contracts will be utilized. For example, where
the Fund anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it may, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurred, the option would most likely not be exercised, and
the diminution in value of portfolio securities would be offset by the amount of
the premium received less related transaction costs.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, less transaction costs, and only if rates
move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the Fund also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
All call and put options written on foreign currencies will be covered. A call
option written on foreign currencies by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
<PAGE> 116
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash or cash equivalents
in a segregated account with its custodian. A put option written by the Fund is
"covered" if the Fund maintains cash or cash equivalents with a value equal to
the exercise price in a segregated account with its custodian, or else holds a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of the
put written if the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian. Call and put options on
foreign currencies may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counterparty
with which, the option is traded and applicable rules and regulations.
ADDITIONAL RISKS OF INVESTING IN OPTIONS ON SECURITIES, OPTIONS ON STOCK
INDICES, OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES. Unlike transactions entered into by the Fund in Futures Contracts,
options on foreign currencies and Forward Contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on securities and on stock indices may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of Forward Contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
The Fund's ability effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, and Forward Contracts will
depend on the degree to which price movements in the underlying instruments
correlate with price movements in the relevant portion of the Fund's portfolio.
If the values of fixed income portfolio securities being hedged do not move in
the same amount or direction as the instruments underlying options, Futures
Contracts or Forward Contracts traded, the Fund's hedging strategy may not be
successful and the Fund could sustain losses on its hedging strategy which would
not be offset by gains on its portfolio. It is also possible that there may be a
negative correlation between the instrument underlying an option, Futures
Contract or Forward Contract traded and the portfolio securities being hedged,
which could result in losses both on the hedging transaction and the portfolio
securities. In such instances, the Fund's overall return could be less than if
the hedging transaction had not been undertaken. In the case of futures and
options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contract. As a
result, the correlation probably will not be exact. Consequently, the Fund bears
the risk that the price of the fixed income portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation. Where the Fund enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Fund incurs the risk of imperfect correlation between changes in the values of
the two currencies, which could result in losses.
The correlation between prices of fixed income securities and prices of options,
Futures Contracts or Forward Contracts may be distorted due to differences in
the nature of the markets, such as differences in margin requirements, the
liquidity of such markets and the participation of speculators in the option,
Futures Contract and Forward Contract markets. Due to the possibility of
distortion, a correct forecast of general interest rate trends by the Adviser
may still not result in a successful transaction. The trading of Options on
Futures Contracts also entails the risk that changes in the value of the
underlying Futures Contract will not be fully reflected in the value of the
option. The risk of imperfect correlation, however, generally tends to diminish
as the maturity or termination date of the option, Futures Contract or Forward
Contract approaches.
The trading of options, Futures Contracts and Forward Contracts also entails the
<PAGE> 117
risk that, if the Adviser's judgment as to the general direction of interest or
exchange rates is incorrect, the Fund's overall performance may be poorer than
if it had not entered into any such contract. For example, if the Fund has
hedged against the possibility of an increase in interest rates, and rates
instead decline, the Fund will lose part or all of the benefit of the increased
value of the fixed income securities being hedged, and may be required to meet
ongoing daily variation margin payments.
It should be noted that the Fund may purchase and write Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes to the extent permitted by
applicable law for the purpose of increasing its return. As a result, the Fund
will incur the risk that losses on such transactions will not be offset by
corresponding increases in the value of fixed income portfolio securities or
decreases in the cost of fixed income securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or expiration,
a position in an exchange-traded Option, Futures Contract, Option on a Futures
Contract or Option on a Foreign Currency can only be terminated by entering into
a closing purchase or sale transaction, which requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. If no such market exists, it may not be possible to close out a position,
and the Fund could be required to purchase or sell the underlying instrument or
meet ongoing variation margin requirements. The inability to close out option or
futures positions also could have an adverse effect on the Fund's ability
effectively to hedge its portfolio.
The liquidity of a secondary market in an option or Futures Contract may be
adversely affected by "daily price fluctuation limits", established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of an
Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON U.S. EXCHANGES -- The available information on which the Fund
will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, and the markets for foreign securities as well as markets in
foreign countries may be operating during non-business hours in the U.S., events
could occur in such markets which would not be reflected until the following
day, thereby rendering it more difficult for the Fund to respond in a timely
manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
<PAGE> 118
the same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or CFTC have jurisdiction
over the trading in the U.S. of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Fund to enter into the trading
strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
The Fund may also be required to receive delivery of the foreign currencies
underlying options on foreign currencies or Forward Contracts it has entered
into. This could occur, for example, if an option written by the Fund is
exercised or the Fund is unable to close out a Forward Contract it has entered
into. In addition, the Fund may elect to take delivery of such currencies. Under
certain circumstances, such as where the Adviser believes that the applicable
exchange rate is unfavorable at the time the currencies are received or the
Adviser anticipates, for any other reason, that the exchange rate will improve,
the Fund may hold such currencies for an indefinite period of time. While the
holding of currencies will permit the Fund to take advantage of favorable
movements in the applicable exchange rate, such strategy also exposes the Fund
to risk of loss if exchange rates move in a direction adverse to the Fund's
position. Such losses could reduce any profits or increase any losses sustained
by the Fund from the sale or redemption of securities and could reduce the
dollar value of interest or dividend payments received.
RISKS OF INVESTMENTS IN EMERGING MARKETS: Investments in emerging markets
involve special risks. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers.
These securities may be considered speculative and, while generally offering
higher income and the potential for capital appreciation, may present
significantly greater risk. Emerging markets may have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in values of the portfolio securities or, if the Fund has
entered into a contract to sell the security, possible liability to the
purchaser. Certain markets may require payment for securities before delivery.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
<PAGE> 119
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
Custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of the swap agreement would
be likely to decline, potentially resulting in losses. If the counterparty
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The Fund anticipates that it will
be able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES: When the Fund commits to purchase a
security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC concerning
such purchases. Since that policy currently recommends that an amount of the
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, the Fund will always have cash, short-term
money market instruments or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, although the Fund does not
intend to make such purchases for speculative purposes and intends to adhere to
the provisions of the SEC policy, purchases of securities on such bases may
involve more risk than other types of purchases. For example, the Fund may have
to sell assets which have been set aside in order to meet redemptions. Also, if
the Fund determines it necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.
LENDING OF FIXED INCOME SECURITIES: The Fund may seek to increase its income by
lending fixed income portfolio securities to entities deemed creditworthy by the
Adviser. Such loans would be required to be secured continuously by collateral
in cash, cash equivalents or U.S. Government Securities maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
The Fund would have the right to call a loan and obtain the securities loaned at
any time on customary industry settlement notice (which will usually not exceed
five days). During the existence of a loan, the Fund would continue to receive
the equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive compensation based on investment of the
collateral. The Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but would call the loan
in anticipation of an important vote to be taken among holders of the securities
or of the giving or withholding of their consent on a material matter affecting
the investment. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the judgment of the
Adviser, the consideration which could be earned currently from securities loans
of this type justifies the attendant risk. If the Adviser determines to make
securities loans, it is not intended that the value of the securities loaned
would exceed 30% of the value of the Fund's total assets.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
<PAGE> 120
futures purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
PORTFOLIO MANAGEMENT: Although the Fund does not intend to seek short-term
profits, securities in its portfolio will be sold whenever the Adviser believes
it is appropriate to do so without regard to the length of time the particular
asset may have been held, subject to tax requirements for the Fund's
qualification as a regulated investment company. A high turnover rate involves
greater expenses, including higher brokerage and transactions costs, to the
Fund. The Fund engages in portfolio trading if it believes a transaction net of
costs (including custodian charges) will help in achieving its investment
objective. See "Portfolio Transactions and Brokerage Commissions" below.
----------------------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this Statement of Additional Information, means
the lesser of (i) more than 50% of the outstanding shares of the Fund (or a
class, as applicable) or (ii) 67% or more of the outstanding shares of the Fund
(or a class, as applicable) present at a meeting at which holders of more than
50% of the outstanding shares of the Fund (or a class, as applicable) are
represented in person or by proxy):
The Fund may not:
(1) borrow money or pledge, mortgage or hypothecate its assets, except as a
temporary measure for extraordinary or emergency purposes, and in no event in
excess of 1/3 of its assets (the Fund will borrow money only from banks; for
the purpose of this restriction, collateral arrangements with respect to
options, Futures Contracts, Options on Futures Contracts, options on foreign
currencies and collateral arrangements with respect to initial and variation
margin are not considered a pledge of assets). While borrowings exceed 5% of
the Fund's gross assets, no securities may be purchased; however, the Fund
may complete the purchase of securities already contracted for;
(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 Futures Contracts, Options on
Futures Contracts and options;
(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 the 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, Options
on Futures 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
<PAGE> 121
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); or
(9) invest more than 25% of the value of its total assets in any industry.
Except with respect to Investment Restriction (1), these investment restrictions
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. As a non-fundamental policy, the Fund will not invest in illiquid
investments, including securities subject to legal or contractual restrictions
on resale or for which there is no readily available market (e.g., trading in
the security is suspended, or, in the case of unlisted securities, where no
market exists), unless the Board of Trustees has determined that such securities
are liquid based on trading markets for the specific security, if more than 15%
of the Fund's assets (taken at market value) would be invested in such
securities. Repurchase agreements maturing in more than seven days will be
deemed to be illiquid for purposes of the Fund's limitation on investment in
illiquid securities. In order to comply with certain federal and state statutes
and regulatory policies, as a matter of operating policy of the Fund, the Fund
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.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the investment management of the Fund's
assets, and the officers of the Trust are responsible for its operations. The
Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, Former Chairman
(until September 30, 1991)
MARSHALL N. COHAN
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical School,
Professor of Surgery
Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; Bank of NT Butterfield & Son
Limited, Chairman.
Address: 21 Reid Street, Hamilton, Bermuda HM 12
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment
advisers), Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc., President and Treasurer (Financial Consultants)
<PAGE> 122
Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES,* Trustee and Vice President
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President (since
January 1990); The Kendall Company (health care products), Chairman and Chief
Executive Officer (prior to January 1990); Colgate-Palmolive Company, Senior
Executive Vice President (prior to January 1990)
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April 1992); Society
National Bank (commercial bank), Director (prior to April 1992)
Address: 5875 Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
JOHN D. LAUPHEIMER, JR.,* Vice President
Masssachusetts Financial Services Company, Vice President
LESLIE J. NANBERG,* Vice President
Massachusetts Financial Services Company, Senior Vice President
JAMES T. SWANSON,* Vice President
Massachusetts Financial Services Company, Senior Vice President
PATRICIA A. ZLOTIN,* Vice President
Massachusetts Financial Services Company, Executive Vice President
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel (since September 1990); associated with a major law firm (prior to
August 1990)
- ----------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund 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
<PAGE> 123
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Fund for the interested Trustees,
except Mr. Bailey. The Fund will accrue compensation expenses each year to cover
current year's service and amortize past service cost.
As of November 30, 1994, all Trustees and officers as a group owned 1.2% of the
outstanding shares of the Fund.
As of November 30, 1994, Merrill Lynch Pierce Fenner & Smith, Inc., P.O. Box
45286, Jacksonville, Florida, was the owner of 5.16% of the outstanding Class B
shares of the Fund. As of November 30, 1994, Painwebber C/F Sue Z. Fuegi,
Atlanta, Georgia, The First National Bank of Boston TR IRA A/C Vickie F. Capano,
Richmond, Virginia and Massachusetts Financial Services, James Russell, Boston,
Massachusetts were the record owners of approximately 74.51%, 13.75% and 7.50%
of the outstanding Class C shares of the Fund.
The Trust's Declaration of Trust provides that it will indemnify its Trustees
and officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the Fund,
unless as to liability to the Fund or its shareholders, it is determined that
they engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or with respect to any
matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Fund. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that they have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to an
Investment Advisory Agreement, dated September 9, 1987 (the "Advisory
Agreement"). The Adviser provides the Fund with overall investment advisory and
administrative services, as well as general office facilities. Subject to such
policies as the Trustees may determine, the Adviser makes investment decisions
for the Fund. For these services and facilities, the Adviser receives an annual
management fee, computed and paid monthly, in an amount equal to the sum of .50%
of the average daily net assets of the Fund and 7.14% of the gross income (i.e.,
income other than gains from the sale of securities, gains from options and
futures transactions, or premiums from options written) of the Fund for the
current fiscal year. Effective June 1, 1993, the Adviser has voluntarily reduced
its right to receive the fee set forth in the Advisory Agreement to a maximum of
0.75% of the average daily net assets of the Fund. This temporary reduction may
be rescinded at any time by the Adviser without notice to shareholders.
For the Fund's fiscal year ended October 31, 1992, MFS was entitled to receive
management fees under the Advisory Agreement of $764,715 (of which $377,098 was
based on average daily net assets and $535,240 on gross income, before a
voluntary reduction of $147,623), equivalent, on an annualized basis, to 1.00%
of the Fund's average daily net assets. For the Fund's fiscal year ended October
31, 1993, MFS was entitled to receive management fees under the Advisory
Agreement of $746,331 (of which $351,152 was based on average daily net assets
and $395,179 on gross income, before a voluntary reduction of $112,230),
equivalent, on an annualized basis, to 1.06% of the Fund's average daily net
assets. For the Fund's fiscal year ended October 31, 1994, MFS was entitled to
receive management fees under the Advisory Agreement of $553,489 (of which
$261,272 was based on average daily net assets and $292,217 on gross income,
before a voluntary reduction of $255,676), equivalent, on an annualized basis,
to 1.06% of the Fund's average daily net assets. In order to comply with the
expense limitations of certain state securities commissions, the Adviser will
reduce its management fee or otherwise reimburse the Fund for any expenses,
exclusive of interest, taxes and brokerage commissions, incurred by the Fund in
any fiscal year to the extent such expenses exceed the most restrictive of such
state expense limitations. The Adviser will make appropriate adjustments to such
reimbursements in response to any amendment or rescission of the various state
requirements. Any such adjustment would not become effective until the beginning
<PAGE> 124
of the Fund's next fiscal year following the date of such amendments or the date
on which such requirements become no longer applicable.
The Fund pays the compensation of the Trustees who are not officers of the
Adviser (who currently receive a fee of $1,250 per year plus $225 per meeting
and committee meeting attended, together with such Trustee's out-of-pocket
expenses) and all the Fund's expenses (other than those assumed by the Adviser
or MFD, the Fund's principal underwriter); including governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable to
the Fund; fees and expenses of independent accountants, of legal counsel, and of
any transfer agent, registrar or dividend disbursing agent of the Fund; expenses
of servicing shareholder accounts; expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements and reports
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 for such purposes 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. For a list of the Fund's expenses, including the
compensation paid to the Trustees who are not officers of the Adviser for the
fiscal year ended October 31, 1994, see "Statement of Operations" in the Fund's
Annual Report to shareholders dated October 31, 1994 incorporated by reference
into this Statement of Additional Information. Payment by the Fund of brokerage
commissions for brokerage and research services of value to the Adviser in
servicing its clients is discussed under the caption "Portfolio Transactions and
Brokerage Commissions."
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions")
and, in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Fund's shares (as defined in
"Investment Objective, Policies and Restrictions"), or by either party on not
more than 60 days' nor less than 30 days' written notice. The Advisory Agreement
provides that if MFS ceases to serve as the Adviser to the Fund, the Fund will
change its name so as to delete the initials "MFS" and that MFS may render
services to others and may permit other fund clients to use the initials "MFS"
in their names. The Advisory Agreement also provides that neither the Adviser
nor its personnel shall be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
execution and management of the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the Advisory
Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Trustees have reviewed and approved as in the best interests
of the Fund and the shareholders subcustodial arrangements with the Chase
Manhattan Bank, N.A. for securities of the Fund held outside the United States.
<PAGE> 125
The Custodian also acts as the dividend disbursing agent of the Fund. The
Custodian has contracted with the Adviser for the Adviser to perform certain
accounting functions related to options transactions for which the Adviser
receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS , is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement dated May 6, 1991 (the "Agency Agreement") with
the Fund. The Shareholder Servicing Agent's responsibilities under the Agency
Agreement include administering and performing transfer agent functions and the
keeping of records in connection with the issuance, transfer and redemption of
each class of shares of the Fund. For these services, the Shareholder Servicing
Agent will receive a fee based on the net assets each class of shares of the
Fund computed and paid monthly. In addition, the Shareholder Servicing Agent
will be reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. For the fiscal year ended October 31,
1994, the Fund paid the Shareholder Servicing Agent fees of $80,661 under the
Agency Agreement. State Street Bank and Trust Company, the dividend and
distribution disbursing agent of the Fund, has contracted with the Shareholder
Servicing Agent to perform certain dividend and distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement dated as of
January 1, 1995. 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 shares of the Fund to dealers. The
public offering price of Class A shares of the Fund is their net asset value
next computed after the sale plus a sales charge which varies based upon the
quantity purchased. The public offering price of a Class A share of the Fund is
calculated by dividing the net asset value of a Class A share by the difference
(expressed as a decimal) between 100% and the sales charge percentage of
offering price applicable to the purchase (see "Purchases" in the Prospectus).
The sales charge scale set forth in the Prospectus applies to purchases of Class
A shares of the Fund alone or in combination with shares of all classes of
certain other funds in the MFS Family of Funds (the "MFS Funds") and other funds
(as noted under Right of Accumulation). A group might qualify to obtain quantity
sales charge discounts (see "Investment and Withdrawal Programs" in this
Statement of Additional Information).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of the Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described in
the Prospectus.
CLASS B SHARES: MFD acts as agent in selling Class B shares of the Fund to
dealers. The public offering price of Class B shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus).
<PAGE> 126
CLASS C SHARES: MFD acts as agent in selling Class C shares of the Fund to
dealers. The public offering price of Class C shares is their net asset value
next computed after the sale.
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the Fund's fiscal year ended October 31, 1994, MFD received sales charges
of $7,725 and dealers received sales charges of $73,526 (as their concession on
gross sales charges of $81,251) for selling Class A shares of the Fund; the Fund
received $3,182,771 representing the aggregate net asset value of such shares.
During the Fund's fiscal year ended October 31, 1993, MFD and certain other
financial institutions received net commissions of $29,508 and $146,036,
respectively (as their concession on gross commissions of $175,544), for selling
shares of the Fund. The Fund received $5,401,513 representing the aggregate net
asset value of such shares. During the Fund's fiscal year ended October 31,
1992, gross sales charges on sales of shares amounted to $692,245, of which
$114,773 was retained by MFD and $577,472 by dealers and certain other financial
institutions. The Fund received $16,500,589 representing the aggregate net asset
value of such shares.
During the Fund's fiscal year ended October 31, 1994, the CDSC imposed on
redemption of Class B shares was $7,154. During the period from September 7,
1993 through October 31, 1994, the CDSC imposed on redemption of Class B shares
was $7,154.
The Distribution Agreement will remain in effect until August 1, 1995 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objective, Policies and Restrictions --
Investment Restrictions") and in either case, by a majority of the Trustees who
are not parties to the Distribution Agreement or interested persons of any such
party. The Distribution Agreement terminates automatically if it is assigned and
may be terminated without penalty by either party on not more than 60 days' nor
less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser in a similar capacity. Changes in
the Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
U.S. and in some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries both debt and equity securities
are traded on exchanges at fixed commission rates. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized by
the Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser. At
present no arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the National Association of Securities Dealers, Inc. (the "NASD") and such
other policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of the other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser, an amount of
commission for effecting a securities transaction for the Fund in excess of the
<PAGE> 127
amount other broker-dealers would have charged for the transaction, if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other clients.
Not all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
through such broker-dealers, but at present, unless otherwise directed by the
Fund, a commission higher than one charged elsewhere will not be paid to such a
firm solely because it provided such Research. The Trustees (together with the
Trustees of the other MFS Funds) have directed the Adviser to allocate a total
of $20,000 of commission business from the MFS Funds to the Pershing Division of
Donaldson, Lufkin and Jenrette as consideration for the annual renewal of the
Lipper Directors' Analytical Data Service (which provides information useful to
the Trustees in reviewing the relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research service. To the
extent the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed those
that might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and research, by an amount which cannot be presently
determined. Such services would be useful and of value to the Adviser in serving
both the Fund and other clients and, conversely, such services obtained by the
placement of brokerage business of other clients would be useful to the Adviser
in carrying out its obligations to the Fund. While such services are not
expected to reduce the expenses of the Adviser, the Adviser would, through use
of the services, avoid the additional expenses which would be incurred if it
should attempt to develop comparable information through its own staff.
For the Fund's fiscal year ended October 31, 1992, total brokerage commissions
of $37,794.69 were paid on total transactions of $580,195,993. During its fiscal
year ended October 31, 1993, total brokerage commissions of $15,404 were paid on
total transactions of $381,500,969. For the fiscal year ended October 31, 1994,
total brokerage commissions of $2,399.00 were paid on total transactions of
$156,786,605.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
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the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Fund is concerned.
In other cases, however, the Fund believes that its ability to participate in
volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or MFS Fixed Fund (a bank collective investment
fund) within a 13-month period (or 36-month period, in the case of purchases of
$1 million or more), the shareholder may obtain Class A shares of the Fund at
the same reduced sales charge as though the total quantity were invested in one
lump sum by completing the Letter of Intent section of the Account Application
or filing a separate Letter of Intent application (available from the
Shareholder Servicing Agent) within 90 days of the commencement of purchases.
Subject to acceptance by MFD and the conditions mentioned below, each purchase
will be made at a public offering price applicable to a single transaction of
the dollar amount specified in the Letter of Intent application. The shareholder
or his dealer must inform MFD that the Letter of Intent is in effect each time
shares are purchased. The shareholder makes no commitment to purchase additional
shares, but if his purchases within 13 months (or 36 months in the case of
purchases of $1 million or more) plus the value of shares credited toward
completion of the Letter of Intent do not total the sum specified, he will pay
the increased amount of the sales charge as described below. Instructions for
issuance of shares in the name of a person other than the person signing the
Letter of Intent application must be accompanied by a written statement from the
dealer stating that the shares were paid for by the person signing such Letter.
Neither income dividends nor capital gain distributions taken in additional
shares will apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the Fund
pursuant to the Distribution Investment Program will also not apply toward
completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when that shareholder's new
investment, together with the current offering price value of all holdings of
all classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund (a
bank collective investment fund) reaches a discount level. The current offering
price value of an investor's holdings of Class C shares will apply toward
cumulative quantity discounts on purchases of Class A shares. See "Purchases" in
the Prospectus for the sales charges on quantity discounts. 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
<PAGE> 129
for the $25,000 purchase would be at the rate of 4% (the rate applicable to
single transactions of $100,000). A shareholder must provide the Shareholder
Servicing Agent (or his investment dealer must provide MFD) with information to
verify that the quantity sales charge discount is applicable at the time the
investment is made.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital
gains made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at the
close of business on the payable date for the distribution. A shareholder
considering the Distribution Investment Program should obtain and read the
prospectus of the other fund and consider the differences in objectives and
policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
as designated on the Account Application and based upon the value of his
account. Each payment under a Systematic Withdrawal Plan ("SWP") must be at
least $100, except certain limited circumstances. The aggregate withdrawals of
Class B shares in any year pursuant to a SWP generally are limited to 10% of the
value of the account at the time of establishment of the SWP. SWP payments are
drawn from the proceeds of share redemptions (which would be a return of
principal and, if reflecting a gain, would be taxable). Redemptions of Class B
shares will be made in the following order: (i) any "Reinvested Shares"; (ii) to
the extent necessary, any "Free Amount"; and (iii) to the extent necessary, the
earliest "Direct Purchase" subject to the lowest CDSC (as such terms are defined
in "Contingent Deferred Sales Charge" in the Prospectus). The CDSC will be
waived in the case of redemptions of Class B shares pursuant to a SWP, but will
not be waived in the case of SWP redemptions of Class A shares which are subject
to a CDSC. To the extent that redemptions for such periodic withdrawals exceed
dividend income reinvested in the account, such redemptions will reduce and may
eventually exhaust the number of shares in the shareholder's account. All
dividend and capital gain distributions for an account with a SWP will be
received in full and fractional shares of the Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $10,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. Maintaining a withdrawal plan
concurrently with an investment program would be disadvantageous because of the
sales charges included in share purchases. The shareholder by written
instruction to the Shareholder Servicing Agent may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any
time by mailing a check payable to the Fund directly to the Shareholder
Servicing Agent. The shareholder's account number and the name of his investment
dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker- dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
<PAGE> 130
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds, if available for sale, selected by the shareholder. Under
the Automatic Exchange Plan, exchanges of at least $50 each may be made to up to
four different funds effective on the seventh day of each month or of every
third month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Transfers will continue to be made from a
shareholder's account, in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No service fee for exchanges will be charged in connection with the Automatic
Exchange Plan. However, exchanges of shares of MFS Money Market Fund, MFS
Government Money Market Fund and Class A shares of MFS Cash Reserve Fund will be
subject to any applicable sales charge. Changes in amounts to be exchanged to
each fund, the funds to which exchanges are to be made and the timing of
exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's transfer.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where shares
of such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six years of
the initial purchase in the case of Class B shares or 12 months of the initial
purchase in the case of certain Class A shares, a CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events, a
reinvestment within such 90-day period of time in the same fund may be
considered a "wash sale" and may result in the inability to recognize currently
all or a portion of a loss realized on the original redemption for federal
income tax purposes. Please see your tax advisor for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with the Fund for which payment
<PAGE> 131
has been received by the Fund (i.e. an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale)
at net asset value. Exchanges will be made only after instructions in writing or
by telephone (an "Exchange Request") are received for an established account by
the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing - signed by
the record owner(s) exactly as the shares are registered; if by telephone -
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar
401(k) recordkeeping system made available by MFS Service Center, Inc.) or all
the shares in the account. Each exchange involves the redemption of the shares
of the Fund to be exchanged and the purchase at net asset value (i.e., without a
sales charge) of shares of the same class of the other MFS Fund. Any gain or
loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax- deferred retirement plan
or other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the New
York Stock Exchange (the "Exchange"), the exchange usually will occur on that
day if all the requirements set forth above have been complied with at that
time. However, payment of the redemption proceeds by the Fund, and thus the
purchase of shares of the other MFS Fund, may be delayed for up to seven days if
the Fund determines that such a delay would be in the best interest of all its
shareholders. Investment dealers which have satisfied criteria established by
MFD may also communicate a shareholder's Exchange Request to MFD by facsimile
subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. Any gain or loss on the redemption of
the shares exchanged is reportable on the shareholder's federal income tax
return, unless such shares were held in a tax-deferred retirement plan.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund and MFS Government Money Market Fund for
shares acquired through direct purchase and dividends reinvested prior to June
1, 1992) have the right to exchange their shares for shares of the Fund, subject
to the conditions, if any, set forth in their respective prospectuses. In
addition, unitholders of the MFS Fixed Fund (a bank collective investment fund)
have the right to exchange their units (except units acquired through direct
purchases) for shares of the Fund, subject to the conditions, if any, imposed
upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
<PAGE> 132
Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition and holding period
of the Fund's portfolio assets. Because the Fund intends to distribute all of
its net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
although the Fund's foreign-source income may be subject to foreign withholding
taxes. If the Fund should fail to qualify as a "regulated investment company" in
any year, the Fund would incur a regular corporate federal income tax upon its
taxable income and Fund distributions would generally be taxable as ordinary
dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from income including certain foreign currency
gains and any distributions from net short-term capital gains (whether received
in cash or reinvested in additional shares) are taxable to shareholders as
ordinary income for federal income tax purposes. A portion of the Fund's
ordinary income dividends (but none of its capital gains) is eligible for the
dividends-received deduction for corporations if the recipient otherwise
qualifies for that deduction with respect to its holding of Fund shares.
Availability of the deduction for particular corporate shareholders is subject
to certain limitations, and deducted amounts may be subject to the alternative
minimum tax or result in certain basis adjustments. Distributions from net
capital gains, (i.e., the excess of the net long-term capital gains over the
short-term capital losses), whether received in cash or invested in additional
shares, are taxable to the Fund's shareholders as long-term capital gains for
federal income tax purposes regardless of how long they have owned shares in the
Fund. Fund dividends declared in October, November or December and paid the
following January, will be taxable to shareholders as if received on December 31
of the year in which they are declared.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as 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 redemption of shares may also be disallowed under rules relating
<PAGE> 133
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) of the Fund or of
another MFS Fund (or any other shares of an MFS Fund generally sold subject to a
sales charge) without payment of an additional sales charge of Class A shares.
The Fund's transactions in Options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on such day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio will 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.
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. The
Fund's investment in zero coupon securities, deferred interest bonds, PIK bonds,
certain stripped securities, and certain securities purchased at a market
discount will cause it to realize income prior to the receipt of cash payments
with respect to those securities. In order to distribute this income and avoid a
tax on the Fund, the Fund may be required to liquidate portfolio securities that
it might otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the Fund.
An investment in residual interests of a CMO that has elected to be treated as a
real estate mortgage investment conduit, or "REMIC", can create complex tax
problems, especially if the Fund has state or local governments or other tax-
exempt organizations as shareholders.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies for
nonhedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. The
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source; the Fund does not
expect to be able to pass through to shareholders foreign tax credits with
respect to such foreign taxes. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of tax
or an exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is impossible to determine the effective rate
of foreign tax in advance since the amount of the Fund's assets to be invested
within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to withholding, regardless
of whether a lower treaty rate may be permitted. Any amounts overwithheld may be
recovered by such persons by filing a claim for refund with the U.S. Internal
Revenue Service within the time period appropriate to such claims. The Fund is
also required in certain circumstances to apply backup of 31% of taxable
dividends and redemption proceeds paid to any shareholder who does not furnish
to the Fund certain information and certifications or who is otherwise subject
to backup withholding. Backup withholding will not, however, be applied to
<PAGE> 134
payments that have been subject to 30% withholding. Distributions received from
the Fund by Non-U.S. Persons may also be subject to tax under the laws of their
own jurisdictions.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes in certain states. The Fund intends to advise
shareholders of the extent, if any, to which its distributions consist of such
interest. Shareholders are urged to consult their tax advisors regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes as well as regarding the tax consequences of an investment in the
Fund.
7. DISTRIBUTION PLANS
CLASS A DISTRIBUTION PLAN: The Trustees have adopted a Distribution Plan
relating to Class A shares (the "Class A Distribution Plan") pursuant to Section
12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Rule") after having
concluded that there is a reasonable likelihood that the Class A Distribution
Plan would benefit the Fund and its Class A shareholders. The Class A
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effects that could result were the
Fund required to liquidate portfolio securities to meet redemptions.
The Class A Distribution Plan provides that the Fund will pay MFD up to (but not
necessarily all of) an aggregate of 0.35% of the average daily net assets
attributable to the Class A shares annually in order that MFD may pay expenses
on behalf of the Fund related to the distribution and servicing of its Class A
shares. The expenses to be paid by MFD on behalf of the Fund include a service
fee to securities dealers which enter into a sales agreement with MFD of up to
0.25% of the portion of the Fund's average daily net assets attributable to the
Class A shares owned by investors for whom that securities dealer is the holder
or dealer of record. These payments are partial consideration for personal
services and/or account maintenance performed by such dealers with respect to
Class A shares. MFD may from time to time reduce the amount of the service fee
paid for shares sold prior to a certain date. Currently the service fee is
reduced to 0.15% for shares sold prior to May 14, 1991. Service fees may be
reduced for a securities dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. No service fee will be paid (i) to any securities
dealer who is the holder or dealer of record for investors who own 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 if the dealer satisfies
certain criteria), or (ii) to any insurance company which has entered into an
agreement with the Fund and MFD that permits such insurance company to purchase
shares from the Fund at their net asset value in connection with annuity
agreements issued in connection with the insurance company's separate accounts.
Dealers may from time to time be required to meet certain other criteria in
order to receive service fees. MFD or its affiliate shall be entitled to receive
any service fee payable under the Class A Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
peformed by MFD or its affiliate for shareholder accounts.
MFD will also retain a distribution fee of 0.10% per annum of the Fund's average
daily net assets attributable to Class A shares as partial consideration for
services performed and expenses incurred in the performance of MFD's obligations
as to Class A shares under the distribution agreement with the Fund. Any
remaining funds may be used to pay for other distribution related expenses as
described in the Prospectus. Certain banks and other financial institutions that
have agency agreements will MFD will receive agency transaction and service fees
that are the same as commissions and service fees to dealers. For the fiscal
year ended October 31, 1994, the Fund incurred expenses of $171,085 and
securities dealers of the Fund and certain banks and other financial
institutions received $139,529.
<PAGE> 135
CLASS B DISTRIBUTION PLAN: The Trustees of the Fund have adopted a Distribution
Plan relating to Class B shares (the "Class B Distribution Plan") pursuant to
Section 12(b) of the 1940 Act and the Rule, after having concluded that there
was a reasonable likelihood that the Class B Distribution Plan would benefit
that Fund and the Class B shareholders of the Fund. The Class B Distribution
Plan is designed to promote sales, thereby increasing the net assets of the
Fund. Such an increase may reduce the expense ratio to the extent the Fund's
fixed costs are spread over a larger net asset base. Also, an increase in net
assets may lessen the adverse effects that could result were the Fund required
to liquidate portfolio securities to meet redemptions. There is, however, no
assurance that the net assets of the Fund will increase or that the other
benefits referred to above will be realized.
The Class B Distribution Plan provides that the Fund shall pay MFD, as the
Fund's distributor for its Class B shares, a daily distribution fee payable
monthly and equal on an annual basis to 0.75% of the Fund's average daily net
assets and will pay MFD a service fee up to 0.25% of the Fund's average daily
net assets attributable to Class B shares (which MFD will in turn pay to
securities dealers which enter into a sales agreement with MFD and which are the
holders of record of the Fund's Class B shares). This service fee is intended to
be additional consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to Class B shares. MFD will advance
to dealers the first-year service fee at a rate equal to 0.25% of the amount
invested. As compensation therefor, MFD may retain the service fee paid by the
Fund with respect to such shares for the first year after purchase. Dealers will
become eligible for additional service fees with respect to such shares
commencing in the thirteenth month following purchase. Except in the case of the
first year service fee, no service fee will be paid to any securities dealer who
is the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined from time to time by MFD. MFD, however, may waive this minimum amount
requirement from time to time if the dealer satisfies certain criteria. Dealers
may from time to time be required to meet certain other criteria in order to
receive service fees. MFD or its affiliates shall be entitled to receive any
service fee payable under the Class B Distribution Plan for which there is no
dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates for shareholder accounts.
The purpose of distribution payments to MFD under the Class B Distribution Plan
is to compensate MFD for its distribution services to the Fund. MFD pays
commissions to dealers as well as expenses of printing prospectuses and reports
used for sales purposes, expenses 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. The Class B Distribution Plan
also provides that MFD will receive all CDSCs attributable to Class B shares
(see "Distribution Plan" and "Purchases" in the Prospectus).
For the fiscal year ended October 31, 1994, the Fund incurred expenses of
$26,470 (equal to 1.00% of the Fund's average daily net assets attributable to
Class B shares) relating to the distribution and servicing of it's Class B
shares, of which FSI received $0 and securities dealers of the Fund and certain
banks and other financial institutions received $26,470.
CLASS C DISTRIBUTION PLAN: The Distribution Plan relating to Class C shares (the
"Class C Distribution Plan") provides that the Fund will pay MFD a distribution
fee of up to 0.75% per annum of the Fund's average daily net assets attributable
to Class C shares and will annually pay MFD a service fee of up to 0.25% per
annum of the Fund's average daily net assets attributable to Class C shares
(which MFD will in turn pay to securities dealers which enter into a sales
agreement with MFD at a rate of up to 0.25% per annum of the Fund's daily net
assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record).
The distribution/service fees attributable to Class C shares are designed to
permit an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing MFD to compensate
broker-dealers in connection with the sale of such shares.
<PAGE> 136
The service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class C shares. MFD or its affiliates are entitled to retain all service fees
payable under the Class C Distribution Plan with respect to accounts for which
there is no dealer of record as partial consideration for personal services
and/or account maintenance services performed by MFD or its affiliates for
shareholder accounts.
The purpose of the distribution payments to MFD under the Class C Distribution
Plan is to compensate MFD for its distribution services to the Fund.
Distribution payments under the Plan will be used by MFD to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
or dealer of record.) MFD also pays 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 compensation of personnel and all costs of travel,
office expense and equipment. Since MFD's compensation is not directly tied to
its expenses, the amount of compensation received by MFD during any year may be
more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by MFD in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with MFD will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares.
For the period September 1, 1994 to October 31, 1994, the Fund incurred expenses
of $12 (equal to 0.19% of its average daily net assets attributable to Class C
shares) relating to the distribution and servicing of Class C shares, all of
which was paid to securities dealers of the Fund and certain banks and other
financial institutions.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1995, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this Statement of Additional Information, the Exchange is open for
trading every weekday except for the following holidays (or the days on which
they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day,
<PAGE> 137
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once each day as of the close of regular trading on the
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Equity securities
in the Fund's portfolio are valued at the last sale price on the exchange on
which they are primarily traded or on the NASDAQ system for unlisted national
market issues, or at the last quoted bid price for listed securities in which
there were no sales during the day or for unlisted securities not reported on
the NASDAQ system. Bonds and other fixed income securities (other than short-
term obligations) of U.S. issuers in the Fund's portfolio are valued on the
basis of valuations furnished by a pricing service which utilizes both dealer-
supplied valuations and electronic data processing techniques which take into
account appropriate factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Forward
Contracts will be valued using a pricing model taking into consideration market
data from an external pricing source. Use of the pricing services has been
approved by the Board of Trustees. All other securities, futures contracts and
options in the Fund's portfolio (other than short-term obligations) for which
the principal market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at the
settlement price prior to the determination (or if there has been no current
sale, at the closing bid price) on the primary exchange on which such
securities, futures contracts or options are traded; but if a securities
exchange is not the principal market for securities, such securities will, if
market quotations are readily available, be valued at current bid prices, unless
such securities are reported on the NASDAQ system, in which case they are valued
at the last sale price or, if no sales occurred during the day, at the last
quoted bid price. Short-term obligations in the Fund's portfolio are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Short-term obligations with a remaining maturity in excess of 60 days
will be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD prior to the
close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (5% maximum for Class B shares purchased on and after
January 1, 1993, but before September 1, 1993 and 4% maximum for Class B shares
purchased on and after September 1, 1993) and therefore may result in a higher
rate of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the sales charge (4.75% maximum for Class
A shares) and/or (iii) total rates of return which represent aggregate
performance over a period or year-by-year performance, and which may or may not
reflect the effect of the maximum or other sales charge or CDSC. The average
annual total rate of return for Class A shares for the one-year and the
five-year periods ended October 31, 1994, and for the period from October 29,
1987 (commencement of offering of this class of share) to October 31, 1994 was
7.80%, 6.59% and 7.61% (including the effect of the sales charge) and -3.15%,
7.64% and 8.34% (without the effect of the sales charge).
<PAGE> 138
The average annual total rate of return for Class B shares for the one-year
period ended October 31, 1994 and for the period from September 7, 1993
(commencement of offering of this class of share) to October 31, 1994 was -7.55%
and -5.65% (including the effect of the CDSC) and -3.97% and -2.50% (without the
effect of the CDSC).
The Fund's aggregate total rate of return for the Class C shares, for the period
September 1, 1994 to October 31, 1994 was 1.23%. The figures presented for Class
C shares are not calculated on an annualized basis. The aggregate total rate of
return represents a limited time frame and, like the total rates of return
presented above for Class A and Class B shares, may not be indicative of future
performance. Total rate of return figures would have been lower if fee waivers
were not in place.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares, cover the period
from the commencement of investment operations, October 29, 1987, to October 31,
1994. It has been assumed that dividends and capital gain distributions were
reinvested in additional shares. These performance results, as well as any yield
or total rate of return quotation provided by the Fund, should not be considered
as representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary based not
only on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate yields and total rates of return should be
considered when comparing the yield and total rate of return of the Fund to
yields and total rates of return published for other investment companies or
other investment vehicles. Total rate of return reflects the performance of both
principal and income. Current net asset value of shares and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
<TABLE>
<CAPTION>
MFS STRATEGIC INCOME FUND -- CLASS A
- ---------------------------------------------------------------------------------
DIRECT CAP. GAIN DIVIDEND TOTAL
DATE INVESTMENT REINVESTMENT REINVESTMENT VALUE
- ---------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
12/31/87 $9,765 $ 0 $ 146 $ 9,911
12/31/88 9,735 36 1,382 11,153
12/31/89 8,920 33 2,660 11,613
12/31/90 7,729 28 3,986 11,743
12/31/91 8,441 31 6,190 14,662
12/31/92 8,054 30 7,350 15,434
12/31/93 8,503 31 8,940 17,474
12/31/94 7,484 27 8,927 16,438
- ------------
<FN>
*From commencement of investment operations, October 29, 1987.
</TABLE>
EXPLANATORY NOTES: The results in the table assume that the initial investment
has been reduced by the current maximum sales charge applicable to Class A
shares of 4.75%. No adjustment has been made for any income taxes payable by
shareholders or for the distribution fees which became effective on May 14,
1991.
YIELD: Any yield quotation for a class of shares of the Fund will be based on
the annualized net investment income per share of that class over a 30-day
period. The yield is calculated by dividing the net investment income per share
allocated to a particular class of the Fund earned during the period by the
maximum offering price per share of such class on the last day of that period.
The resulting figure is then annualized. Net investment income per share of a
class is determined by dividing (i) the dividends and interest earned by the
Fund allocated to the class during the period, minus accrued expenses of such
class for the period, by (ii) the average number of shares of such class
entitled to receive dividends during the period multiplied by the maximum
offering price per share of such class on the last day of the period. The Fund's
yield calculations assume a maximum sales charge of 4.75% in the case of Class A
shares and no payment of any CDSC in the case of Class B shares. The yield
calculation for Class A shares of the Fund for the 30-day period ended October
31, 1994 was 6.78%, taking into account certain fee waivers; without these
<PAGE> 139
waivers, the yield would have been 6.55%. The yield calculation for Class B
shares for the 30-day period ended October 31, 1994 was 6.46%, taking into
account certain fee waivers; without these waivers, the yield would have been
6.21%. The yield calculation for Class C shares for the 30-day period ended
October 31, 1994 was 6.63%, taking into account certain fee waivers; without
these waivers, the yield would have been 6.38%.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which were or will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends paid during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares assumes no CDSC is paid. The current distribution rate for
Class A shares of the Fund for the twelve-month period ended on October 31, 1994
was 6.40%. The current distribution rate for Class B shares of the Fund based on
the twelve-month period ended October 31, 1994, was 6.29%. The current
distribution rate for Class C shares of the Fund based on the annualization of
the last dividend paid during the last fiscal year, was 7.26%.
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co.Fund performance
may also be compared to the performance of other mutual funds tracked by
financial or business publications or periodicals. The Fund may also quote
evaluations mentioned in independent radio or television broadcasts and use
charts and graphs to illustrate the past performance of various indices such as
those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first 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.
<PAGE> 140
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders 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 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, multi-
market high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS Regatta becomes America's first non-qualified market-value-
adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the
first trust to invest solely in companies deemed to be union- friendly by
an Advisory Board of senior labor officials, senior managers of companies
with significant labor contracts, academics and other national labor
leaders or experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any series
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in that series. The Declaration of Trust
further authorizes the Trustees to classify or reclassify any series of shares
into one or more classes. Pursuant thereto, the Trustees have authorized the
issuance of three classes of shares of each series of the Trust, Class A shares,
Class B shares and Class C shares. Each share of a class of the Fund represents
an equal proportionate interest in the assets of the Fund allocable to that
class. Upon liquidation of the Fund, shareholders of each class of the Fund are
entitled to share pro rata in the Fund's net assets allocable to such class
available for distribution to shareholders. The Fund reserves the right to
create and issue a number of series and additional classes of shares, in which
case the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Fund. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Fund. No material amendment may be made to the Trust's
Declaration of Trust without the affirmative vote of a majority of the Fund's
outstanding shares (as defined in "Investment Restrictions"). The Fund may be
terminated (i) upon the merger or consolidation of the Fund with another
organization or upon the sale of all or substantially all of its assets, if
approved by the vote of the holders of two-thirds of the Fund's outstanding
shares, except that if the Trustees recommend such merger, consolidation or
sale, the approval by vote of the holders of a majority of the Fund's
<PAGE> 141
outstanding shares will be sufficient, or (ii) upon liquidation and distribution
of the assets of the Fund, if approved by the vote of the holders of two-thirds
of its outstanding shares of the Fund, or (iii) by the Trustees by written
notice to its shareholders. If not so terminated, the Fund will continue
indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Fund and provides for indemnification
and reimbursement of expenses out of Fund property for any shareholder held
personally liable for the obligations of the Fund. The Declaration of Trust also
provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Fund and its shareholders and the Trustees, officers, employees and agents of
the Fund covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the Fund
itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP were the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC, for the fiscal year ended October
31, 1994.
The financial statements of the Fund, including the Portfolio of Investments and
Statement of Assets and Liabilities at October 31, 1994, and the Statement of
Operations, Statement of Changes in Net Assets and Financial Highlights for the
year then ended, each of which is included in the Annual Report to Shareholders
of the Fund, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report therein. Such financial statements are incorporated by
reference into this Statement of Additional Information in reliance upon the
report of Ernst & Young LLP given upon their authority as experts in accounting
and auditing.
Coopers & Lybrand were the Fund's independent accountants from the Fund's
commencement of operations, October 29, 1987 to October 31, 1993, and were
responsible for providing audit services, tax return preparation and assistance
and consultation with respect to the preparation of filings with the SEC. The
Statement of Changes in Net Assets for the year ended October 31, 1993 and the
Financial Highlights table for the period from October 29, 1987 (commencement of
operations) to October 31, 1993 each of which is included in the Annual Report
to Shareholders, were audited by Coopers & Lybrand LLP and are incorporated by
reference into this Statement of Additional Information in reliance upon the
report of Coopers & Lybrand, independent accountants of the Fund for its fiscal
years through October 31, 1993.
<PAGE> 142
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
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R)
Strategic
Income Fund
500 BOYLSTON STREET
BOSTON, MA 02116
THE FIRST NAME IN MUTUAL FUNDS
MSI-13-3/95/500M
<PAGE> 143
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - October 31, 1994
Bonds - 82.9%
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Dollar Denominated - 58.7%
Financial Institutions - 1.1%
Leucadia National Corp., 10.375s, 2002 $ 500 $ 530,000
- ---------------------------------------------------------------------------------------------------------------------
Foreign - U.S. Dollar Denominated - 15.1%
Federal Republic of Brazil, 8.75s, 2009 $ 250 $ 158,437
Federal Republic of Brazil, 6s, 2024 3,000 1,942,500
HidroElectrica Alicura, 8.375s, 1999<F4> 500 440,625
Mexico Discount Notes, 0s, 2019 2,000 1,707,500
Mexico UMS Par CL A, 6.25s, 2019 250 158,126
Republic of Argentina, 10.95s, 1999 500 493,750
Republic of Argentina, 4.25s, 2005 3,500 2,559,375
-----------
$ 7,460,313
- ---------------------------------------------------------------------------------------------------------------------
Industrials - 30.1%
Building - 2.3%
American Standard, Inc., 10.5s, 2005 $1,000 $ 670,000
Atlantic Gulf Communities Corp., 0s, 1996<F4> 157 133,110
Atlantic Gulf Communities Corp., 0s, 1998<F4> 157 86,130
FM Holdings, Inc., 13.125s, 2005 250 250,000
-----------
$ 1,139,240
- ---------------------------------------------------------------------------------------------------------------------
Chemicals - 3.3%
Harris Chemical North America, 10.75s, 2003 $ 500 $ 460,000
NL Industries, Inc., 11.75s, 2003 250 254,375
Rexene Corp., 9s, 1999 250 248,750
UCC Investors Holdings, Inc., 0s, 2005<F1> 1,000 657,500
-----------
$ 1,620,625
- ---------------------------------------------------------------------------------------------------------------------
Conglomerates - 0.2%
Bell & Howell Group Co., 10.75s, 2002 $ 100 $ 96,000
- ---------------------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.6%
Calmar Spraying Systems, Inc., 0s, 1999 $ 250 $ 252,500
Fieldcrest Cannon, Inc., 11.25s, 2004 250 255,000
Ithaca Industries, Inc., 11.125s, 2002 100 92,000
Revlon Consumer Products Corp., 10.5s, 2003 950 852,625
Revlon Worldwide Corp., 0s, 1998<F1> 200 110,000
Westpoint Stevens, Inc., 9.375s, 2005 250 223,438
-----------
$ 1,785,563
- ---------------------------------------------------------------------------------------------------------------------
Containers - 2.3%
Container Corp of America, 9.75s, 2003 $ 700 $ 675,500
Ivex Packaging Corp., 12.5s, 2002 100 103,500
Riverwood International Corp., 11.25s, 2002 100 103,250
Stone Container Corp., 9.875s, 2001 250 234,375
-----------
$ 1,116,625
- ---------------------------------------------------------------------------------------------------------------------
Entertainment - 1.1%
SCI Television, Inc., 11s, 2005 $ 455 $ 457,275
United Artist Theater Circuit, Inc., 11.5s, 2002 100 107,000
-----------
$ 564,275
- ---------------------------------------------------------------------------------------------------------------------
Food and Beverage Products - 1.1%
Canandaigua Wine, Inc., 8.75s, 2003 $ 200 $ 180,000
Envirodyne Industries, Inc., 10.25s, 2001 438 346,020
-----------
$ 526,020
- ---------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
- ---------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated - continued
Industrials - continued
Insurance - 0.2%
Bankers Life Holdings Corp., 13s, 2002 $ 100 $ 113,750
- ---------------------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.2%
Integrated Health Services, Inc., 10.75s, 2004 $ 100 $ 101,000
- ---------------------------------------------------------------------------------------------------------------------
Metals and Minerals - 0.9%
Jorgensen Earle (M.) Co., 10.75s, 2000 $ 150 $ 150,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 300 274,500
-----------
$ 424,500
- ---------------------------------------------------------------------------------------------------------------------
Oil Services - 1.1%
Ferrellgas, Inc., 10s, 2001 $ 200 $ 197,000
Giant Industries, Inc., 9.75s, 2003 250 237,500
Tuboscope Vetco International, Inc., 10.75s, 2003 100 99,000
-----------
$ 533,500
- ---------------------------------------------------------------------------------------------------------------------
Oils - 1.1%
Mesa Capital Corp., 0s, 1998 $ 612 $ 521,730
- ---------------------------------------------------------------------------------------------------------------------
Special Products and Services - 4.5%
Ampex Group, Inc., 13.25s, 1996 $ 627 $ 34,485
Astrum International Corp., 11.5s, 2003 209 213,180
Gillett Holdings, Inc., 12.25s, 2002 591 639,294
IMO Industries, Inc., 12s, 2001 128 130,240
K & F Industries, Inc., 11.875s, 2003 250 243,750
Mark IV Industries, Inc., 8.75s, 2003 500 445,000
Polymer Group, Inc., 12.25s, 2002 500 500,000
-----------
$ 2,205,949
- ---------------------------------------------------------------------------------------------------------------------
Steel - 3.2%
AK Steel Holdings Corp., 10.75s, 2004 $ 500 $ 497,500
Bayou Steel Corp., 10.25s, 2001 500 470,000
Geneva Steel Co., 9.5s, 2004 200 177,000
Wheeling Pittsburgh, 9.375s, 2003 500 445,000
-----------
$ 1,589,500
- ---------------------------------------------------------------------------------------------------------------------
Stores - 1.9%
Payless Cashways, Inc., 9.125s, 2003 $ 200 $ 184,000
Woodward & Lothrop, Inc., 12s, 1995<F3> 1,001 770,956
-----------
$ 954,956
- ---------------------------------------------------------------------------------------------------------------------
Telecommunications - 3.1%
Cablevision Industries Corp., 9.25s, 2008 $ 100 $ 89,000
Century Communications Corp., 9.75s, 2002 400 388,000
Falcon Holdings Group LP, 11s, 2003<F5> 175 157,270
Infinity Broadcasting Corp., 10.375s, 2002 250 258,750
Jones Intercable, Inc., 10.5s, 2008 500 500,000
Mobile Media Communications, 0s, 2003 275 159,500
-----------
$ 1,552,520
- ---------------------------------------------------------------------------------------------------------------------
Total Industrials $14,845,753
- ---------------------------------------------------------------------------------------------------------------------
Transportation - 1.6%
Continental Airlines, Inc., 11.75s, 1995<F3> $ 500 $ 70,000
Moran Transportation Co., 11.75s, 2004 100 98,500
Roadmaster Industries, Inc., 11.75s, 2002 500 480,000
Tiphook Finance Corp., 8s, 2000 250 166,250
-----------
$ 814,750
- ---------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
- ---------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------------------------------------------------
U.S. Dollar Denominated - continued
Utilities - 10.8%
CMS Energy Corp., 0s, 1999<F1> $ 500 $ 472,215
First PV Funding Corp., 10.3s, 2014 1,500 1,395,000
First PV Funding Corp., 10.15s, 2016 250 228,125
Maxus Energy Corp., 8.5s, 2008 100 81,000
Maxus Energy Corp., 11.25s, 2013 1,000 980,000
Midland Cogeneration Co., 10.33s, 2002 220 212,650
Midland Funding Corp., 11.75s, 2005 350 328,563
National Power Corp., 7.625s, 2000<F4> 1,000 905,000
TransTexas Gas Corp., 10.5s, 2000 750 721,875
-----------
$ 5,324,428
- ---------------------------------------------------------------------------------------------------------------------
Total U.S. Dollar Denominated $28,975,244
- ---------------------------------------------------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - 22.7%
Australian Dollars - 1.8%
Queensland Treasury Corp., 8s, 1999 AUD 1,325 $ 903,789
- ---------------------------------------------------------------------------------------------------------------------
British Pounds - 4.2%
Czech Electric, 16.5s, 1998 GBP 30,000 $ 1,198,121
United Kingdom Treasury, 6s, 1999 570 837,138
-----------
$ 2,035,259
- ---------------------------------------------------------------------------------------------------------------------
Danish Kroner - 1.5%
Kingdom of Denmark, 9s, 1998 DKK 4,200 $ 719,867
- ---------------------------------------------------------------------------------------------------------------------
Dutch Guilders - 1.3%
Dutch State Loan, 6.25s, 1998 NLG 590 $ 340,805
Netherlands Government, 7.5s, 1999 520 311,728
-----------
$ 652,533
- ---------------------------------------------------------------------------------------------------------------------
French Francs - 2.4%
Government of France, 6.5s, 1996 FRF 1,990 $ 383,496
Government of France, 8s, 1998 3,200 629,738
Government of France, 7s, 1999 980 184,476
-----------
$ 1,197,710
- ---------------------------------------------------------------------------------------------------------------------
German Marks - 3.8%
Deutschland Republic, 6.5s, 2003 DEM 1,130 $ 696,853
Treuhandenstalt-Obligationen, 6.375s, 1999 1,825 1,176,440
-----------
$ 1,873,293
- ---------------------------------------------------------------------------------------------------------------------
Irish Punts - 1.5%
Government of Ireland, 9s, 2001 IEP 450 $ 731,531
- ---------------------------------------------------------------------------------------------------------------------
Italian Lire - 1.3%
Government of Italy, 10s, 1996 ITL 375,000 $ 240,930
Government of Italy, 8.5s, 1999 670,000 392,975
-----------
$ 633,905
- ---------------------------------------------------------------------------------------------------------------------
Japanese Yen - 0.9%
IBRD Global Bonds, 4.5s, 2000 JPY 11,000 $ 115,170
Italian Euro-Yen, 3.5s, 2001 13,000 123,151
Sallie Mae Euro-Yen, 3.2s, 1997 20,000 205,268
-----------
$ 443,589
- ---------------------------------------------------------------------------------------------------------------------
New Zealand Dollars - 0.9%
Government of New Zealand, 8s, 1995 NZD 720 $ 440,197
- ---------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
- ---------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - continued
Spanish Pesetas - 1.1%
Government of Spain, 8.3s, 1998 ESP 51,200 $ 374,142
Government of Spain, 7.4s, 1999 26,500 185,108
-----------
$ 559,250
- ---------------------------------------------------------------------------------------------------------------------
Thai Baht - 2.0%
Siam Commercial Bank, 7s, 1995 THB 25,000 $ 1,003,492
- ---------------------------------------------------------------------------------------------------------------------
Total Foreign - Non-U.S. Dollar Denominated $11,194,415
- ---------------------------------------------------------------------------------------------------------------------
Convertible Bonds - 1.5%
Enquirer/Star Group, Inc., 0s, 1997<F1> $ 750 $ 590,625
Finnish Export Ltd., principal linked note 5.5s, 1995<F2> 860 152,268
-----------
$ 742,893
- ---------------------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $42,579,604) $40,912,552
- ---------------------------------------------------------------------------------------------------------------------
Common Stocks - 7.7%
- ---------------------------------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------------------------------
Astrum International Corp.<F1> 4,659 $ 107,739
Gillett Holdings, Inc.<F1><F4> 22,594 463,177
Independent Bank Co. of Arizona<F1><F4> 125,000 2,750,000
Insilco Corp.<F1> 17,511 468,419
- ---------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $3,437,763) $ 3,789,335
- ---------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.1%
- ---------------------------------------------------------------------------------------------------------------------
UDC Homes, Inc. (Identified Cost, $170,062) 16,585 $ 72,559
- ---------------------------------------------------------------------------------------------------------------------
Warrants - 0.1%
- ---------------------------------------------------------------------------------------------------------------------
Warrants
- ---------------------------------------------------------------------------------------------------------------------
Atlantic Gulf Communities Corp.<F1> 3,109 $ 3,497
Federated Department Stores, Inc.<F1> 4,717 10,613
Forest Oil Corp.<F1> 2,250 3,375
ICO, Inc.<F1> 62,500 40,625
- ---------------------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $9,381) $ 58,110
- ---------------------------------------------------------------------------------------------------------------------
Call Options Purchased - 0.0%
- ---------------------------------------------------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted)
- ---------------------------------------------------------------------------------------------------------------------
Japanese Government Bonds
December/105.826 JPY 133,000 $ 3,990
February/104.19 156,000 19,661
January/96.5458 211,000 5,908
Japanese Yen
December/95 186,540 9,140
- ---------------------------------------------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $80,834) $ 38,699
- ---------------------------------------------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Short-Term Obligations - 4.4%
- ---------------------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------------------------------------------------
Mexican Government Peso, due 2/02/1995 $ 500 $ 490,816
Nafinga Pagares, due 12/13/1994 1,483 427,304
Nafinga Pagares, due 12/15/1994 905 260,111
Nafinga Pagares, due 1/19/1995 3,569 1,009,070
- ---------------------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 2,187,301
- ---------------------------------------------------------------------------------------------------------------------
Repurchase Agreement - 4.9%
- ---------------------------------------------------------------------------------------------------------------------
Prudential Securities, dated 10/31/94, due 11/01/94, total to be
received $2,411,318 (secured by $1,875,000 U.S. Treasury Bonds,
11.875s, due 11/15/03, market value $2,459,813) $2,411 $ 2,411,000
- ---------------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $50,875,945) $49,469,556
- ---------------------------------------------------------------------------------------------------------------------
Call Options Written - (0.6)%
- ---------------------------------------------------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted)
- ---------------------------------------------------------------------------------------------------------------------
Deutsche Marks
December/1.63 DEM 4,865 $ (251,162)
Japanese Yen
May/90 JPY 138,846 (13,051)
December/100 106,067 (38,715)
- ----------------------------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $95,151) $ (302,928)
- ----------------------------------------------------------------------------------------------------------------------
Put Options Written - 0.0%
- ----------------------------------------------------------------------------------------------------------------------
Deutsche Marks
November/1.75 DEM 2,611 $ 0
Japanese Government Bonds
March/104.19 JPY 156,000 (13,884)
- ----------------------------------------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $24,227) $ (13,884)
- ----------------------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.5% $ 242,222
- ----------------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $ 49,394,966
- ----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Non-income producing security.
<F2> Indexed security.
<F3> Non-income producing security - in default.
<F4> Denotes restricted security.
<F5> Denotes payment-in-kind bond.
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
AUD = Australian Dollars FIM = Finnish Markkaa JPY = Japanese Yen
CAD = Canadian Dollars FRF = French Francs NLG = Dutch Guilders
DEM = Deutsche Marks GBP = British Pounds NZD = New Zealand Dollars
DKK = Danish Kroner IEP = Irish Punts SEK = Swedish Kronor
ESP = Spanish Pesetas ITL = Italian Lire
See notes to financial statements
<PAGE>
</TABLE>
<TABLE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------------------
<CAPTION>
October 31, 1994
- ------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $50,875,945) $49,469,556
Cash 7,670
Net receivable for forward foreign currency exchange contracts
purchased 581,796
Net receivable for forward foreign currency exchange contracts 35,658
Receivable for investments sold 587,615
Receivable for Fund shares sold 48,038
Receivable from investment adviser 96,215
Interest and dividends receivable 1,127,394
Other assets 611
-----------
Total assets $51,954,553
-----------
Liabilities:
Payable for investments purchased $ 1,413,747
Payable for Fund shares reacquired 151,453
Written options outstanding, at value (premiums received, $119,378) 316,812
Net payable for forward foreign currency exchange contracts sold 550,252
Payable to affiliates -
Management fee 3,036
Shareholder servicing agent fee 638
Distribution fee 11,527
Accrued expenses and other liabilities 112,122
-----------
Total liabilities $ 2,559,587
-----------
Net assets $49,394,966
-----------
Net assets consist of:
Paid-in capital $51,460,027
Unrealized depreciation on investments and translation of assets and
liabilities in foreign currencies (1,539,854)
Accumulated net realized loss on investments and foreign currency
transactions (487,329)
Accumulated distribution in excess of net investment income (37,878)
-----------
Total $49,394,966
-----------
Shares of beneficial interest outstanding 6,532,465
-----------
Class A shares:
Net asset value and redemption price per share
(net assets of $44,032,050 / 5,820,199 shares of beneficial interest
outstanding) $7.57
-----
Offering price per share (100/95.25 of net asset value per share) $7.95
-----
Class B shares:
Net asset value, redemption price and offering price per share
(net assets of $5,349,707 / 1,755 shares of beneficial interest
outstanding) $7.53
-----
Class C shares:
Net asset value, redemption price and offering price per share
(net assets of $13,209 / 710,511 shares of beneficial interest
outstanding) $7.53
-----
-----
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- --------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31, 1994
- --------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $ 4,056,356
Dividends 36,320
-----------
Total investment income $ 4,092,676
-----------
Expenses -
Management fee $ 553,489
Trustees' compensation 29,163
Shareholder servicing agent fee (Class A) 74,831
Shareholder servicing agent fee (Class B) 5,828
Shareholder servicing agent fee (Class C) 2
Distribution and service fee (Class A) 171,085
Distribution and service fee (Class B) 26,470
Distribution and service fee (Class C) 12
Auditing fees 59,804
Custodian fee 50,255
Printing 47,145
Registration fees 33,561
Legal fees 29,851
Postage 22,725
Miscellaneous 63,864
-----------
Total expenses $ 1,168,085
Reduction of expenses by investment adviser (255,676)
-----------
Net expenses $ 912,409
-----------
Net investment income $ 3,180,267
-----------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $(2,520,058)
Written option transactions (290,584)
Foreign currency transactions (947,074)
-----------
Net realized loss on investments $(3,757,716)
-----------
Change in unrealized appreciation (depreciation) -
Investments $(1,404,897)
Written options (314,018)
Translation of assets and liabilities in foreign currencies 538,413
-----------
Net unrealized loss on investments $(1,180,502)
-----------
Net realized and unrealized loss on investments and foreign
currency $(4,938,218)
-----------
Net decrease in net assets from operations $(1,757,951)
-----------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31, 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 3,180,267 $ 4,153,606
Net realized gain (loss) on investments and
foreign currency transactions (3,757,716) 2,800,411
Net unrealized gain (loss) on investments
and foreign currency (1,180,502) 1,079,754
------------ ------------
Increase (decrease) in net assets from
operations $ (1,757,951) $ 8,033,771
------------ ------------
Distributions declared to shareholders -
From net investment income and foreign
currency transactions (Class A) $ -- $ (2,267,199)
From net investment income and foreign
currency transactions (Class B) -- (445)
From net realized gain on investments
(Class A) -- (2,740,232)
From net realized gain on investments
(Class B) -- (126)
In excess of net investment income and
foreign currency transactions
(Class A) (374,304) --
In excess of net investment income and
foreign currency transactions
(Class B) (12,010) --
In excess of net realized gain on
investments (Class A) (242,005) --
In excess of net realized gain on
investments (Class B) (7,765) --
From paid-in capital (Class A) (2,631,670) (336,629)
From paid-in capital (Class B) (133,652) --
From paid-in capital (Class C) (80) --
------------ ------------
Total distributions declared to
shareholders $ (3,401,486) $ (5,344,631)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 9,558,938 $ 10,004,310
Net asset value of shares issued to
shareholders in reinvestment of
distributions 949,565 1,121,855
Cost of shares reacquired (16,339,414) (30,917,403)
------------ ------------
Decrease in net assets from Fund share
transactions $ (5,830,911) $(19,791,238)
------------ ------------
Total decrease in net assets $(10,990,348) $(17,102,098)
Net assets:
At beginning of year 60,385,314 77,487,412
------------ ------------
At end of year (including accumulated
undistributed (distributions in excess
of) net investment income of $(37,878) and
$1,490,535, respectively) $ 49,394,966 $ 60,385,314
------------ ------------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31, 1994<F2> 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.34 $ 8.00 $ 8.12 $ 7.56 $ 8.93
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.48<F3> $ 0.52<F3> $ 0.63<F3> $ 0.73<F3> $ 0.86<F3>
Net realized and unrealized gain (loss) on
investments (0.74) 0.42 0.08 0.95 (1.03)
------ ------ ------ ------ ------
Total from investment operations $(0.26) $ 0.94 $ 0.71 $ 1.68 $(0.17)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $ -- $(0.24) $(0.56) $(0.73) $(0.82)
From net realized gain on investments -- (0.32) -- -- --
In excess of net investment income and foreign currency (0.06) -- -- -- --
In excess of net realized gain on investments (0.04) -- -- -- --
From paid-in capital (0.41) (0.04) (0.27) (0.39) (0.38)
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.51) $(0.60) $(0.83) $(1.12) $(1.20)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.57 $ 8.34 $ 8.00 $ 8.12 $ 7.56
------ ------ ------ ------ ------
Total return<F1> (3.15)% 12.36% 9.02% 23.78% (1.62)%
Ratios (to average net assets)/Supplemental data:
Expenses 1.71%<F3> 1.98%<F3> 2.02%<F3> 1.87%<F3> 1.47%<F3>
Net investment income 6.11%<F3> 5.92%<F3> 7.47%<F3> 9.26%<F3> 10.42%<F3>
Portfolio turnover 153% 275% 423% 671% 400%
Net assets at end of period (000 omitted) $44,032 $60,120 $77,487 $76,312 $74,555
<FN>
<F1>Total returns do not include the sales charge. If the charge had been
included, the results would have been lower.
<F2>Per share data for the period were calculated using the average share
method.
<F3>The investment adviser did not impose a portion of its management fee for
the periods indicated. If this fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.44 $ 0.49 $ 0.61 $ 0.71 $ 0.83
Ratios (to average net assets):
Expenses 2.21% 2.14% 2.21% 2.16% 1.81%
Net investment income 5.62% 5.76% 7.55% 8.97% 10.08%
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31, 1989 1988 1987<F1> 1994<F6> 1993<F2> 1994<F6><F3>
- -----------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 9.60 $ 9.21 $ 9.35 $ 8.33 $ 8.28 $ 7.53
------- ------ -------- ------ ------ ------
Income from investment operations -
Net investment income $ 0.94 $ 0.93 $ 0.0025 $ 0.45<F7> $ 0.04 $ 0.07
Net realized and
unrealized gain (loss)
on investments (0.38) 0.56 (0.1425) (0.81) 0.05 0.00
------- ------ -------- ----- ------ ------
Total from investment
operations $ 0.56 $ 1.49 $(0.1400) $(0.36) $ 0.09 $ 7.60
------ ------ -------- ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(1.18) $(0.69) $ -- $ -- $(0.03) $ --
From net realized gain on
investments -- (0.41) -- -- (0.01) --
In excess of net
investment income and
foreign currency -- -- -- (0.05) -- --
In excess of net realized
gain on investments -- -- -- (0.03) -- --
From paid-in capital (0.05) -- -- (0.39) -- (0.09)
------ ------ -------- ------ ------ ------
Total distributions
declared to
shareholders $(1.23) $(1.10) $ 0.00 $(0.47) $(0.04) $(0.09)
------ ------ -------- ------ ------ ------
Net asset value - end of
period $ 8.93 $ 9.60 $ 9.21 $ 7.53 $ 8.33 $ 7.53
------ ------ -------- ------ ------ ------
Total return<F5> 5.85% 16.60% (1.50)% (3.97)% 1.15% 1.23%
Ratios (to average net assets)/Supplemental data:
Expenses 1.82% 1.75% 0.57%<F4> 2.43%<F7> 3.03%<F4> 2.16%<F4><F7>
Net investment income 10.05% 9.74% 4.88%<F4> 5.97%<F7> 5.22%<F4> 8.99%<F4><F7>
Portfolio turnover 157% 270% 0% 153% 275% 153%
Net assets at end of period
(000 omitted) $87,978 $93,819 $78,479 $5,350 $ 265 $ 13
<FN>
<F1>For the period from October 29, 1987 (commencement of investment operations)
to October 31, 1987.
<F2>For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
<F3>For the period from the commencement of offering of Class C shares,
September 1, 1994 to October 31, 1994.
<F4>Annualized.
<F5>Total returns do not include the sales charge. If the charge had been
included, the results would have been lower.
<F6>Per share data for the period were calculated using the average share
method.
<F7>The investment adviser did not impose a portion of its management fee for
the periods indicated. If this fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income -- -- -- $ 0.41 -- $ 0.09
Ratios (to average net assets):
Expenses -- -- -- 2.92% -- 2.65%<F4>
Net investment income -- -- -- 5.48% -- 8.50%<F4>
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Strategic Income Fund (the Fund) is a non-diversified series of MFS Series
Trust VIII (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund was originally organized as a
closed-end investment company. Effective May 16, 1994, the Fund changed its name
from MFS Income & Opportunity Fund to MFS Strategic Income Fund.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Non-U.S. dollar denominated short-term obligations are valued at amortized cost
as calculated in the base currency and translated into U.S. dollars at the
closing daily exchange rate. Futures contracts, options and options on futures
contracts listed on commodities exchanges are valued at closing settlement
prices. Over-the-counter options are valued by brokers through the use of a
pricing model which takes into account closing bond valuations, implied
volatility and short-term repurchase rates. Equity securities listed on
securities exchanges or reported through the NASDAQ system are valued at last
sale prices. Unlisted equity securities or listed equity securities for which
last sale prices are not available are valued at last quoted bid prices.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency gains and losses. That portion
of both realized and unrealized gains and losses on investments that results
from fluctuations in foreign currency exchange rates is not separately
disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities, currency or contracts based on financial indices
at a fixed price on a future date. In entering such contracts, the Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, depending on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in financial
futures contracts is designed to hedge against anticipated future changes in
interest or exchange rates or securities prices and may also be used for
non-hedging purposes to the extent permitted by applicable law. Should interest
or exchange rates or securities prices move unexpectedly, the Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss.
Security Loans - The Fund may lend its securities to entities deemed
creditworthy by the Advisor. The loans are collateralized at all times by cash
or securities with a market value at least equal to the market value of
securities loaned. As with other extensions of credit, the Fund may bear the
risk of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. The Fund receives compensation for
lending its securities in the form of fees or from all or a portion of the
income from investment of the collateral. The Fund also continues to earn income
on the securities loaned. At October 31, 1994, the Fund had no securities on
loan.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. The forward
foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded for financial
statement purposes as unrealized until the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security owned
are added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are considered workout expenses and are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are reported as operating
expenses.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a return of capital.
Differences in the recognition or classification of income between the financial
statement and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are reported as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended October 31, 1994 accumulated net investment income
was decreased by $4,322,366, accumulated net realized loss was decreased by
$2,954,370 and paid in capital was increased by $1,367,996 primarily due to
differences between book and tax accounting for currency transactions.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class C shares. Class B and Class C shares were first offered to
the public on September 7, 1993, and September 1, 1994, respectively. The three
classes of shares differ in their respective shareholder servicing agent,
distribution, and service fees. Shareholders of each class also bear certain
expenses that pertain only to that particular class. All shareholders bear the
common expenses of the Fund pro rata based on the average daily net assets of
each class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses, including distribution and shareholder service fees.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee, computed daily and paid monthly at an effective annual rate of
0.50% of average daily net assets and 7.14% of investment income, amounted to
$553,489 for the year ended October 31, 1994. The investment adviser did not
impose a portion of its fee ($255,676), which is reflected as a reduction of
expenses on the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Financial Services, Inc. (FSI)
and MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit
plan for all its independent Trustees. Included in Trustees' compensation is a
net periodic pension expense of $10,505 for the year ended October 31, 1994.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Distributor - FSI, a wholly owned subsidiary of MFS, as distributor, received
$7,725 as its portion of the sales charge on sales of Class A shares of the
Fund. The Trustees have adopted separate distribution plans for Class A and
Class B shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Class A Distribution Plan provides that the Fund will pay FSI up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that FSI may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with FSI of up to 0.25% per annum
(reduced to a maximum of 0.15% for an indefinite period) of the Fund's average
daily net assets attributable to Class A shares which are attributable to that
securities dealer, a distribution fee to FSI of up to 0.10% per annum of the
Fund's average daily net assets attributable to Class A shares, commissions to
dealers and payments to FSI wholesalers for sales at or above a certain dollar
level, and other such distribution-related expenses that are approved by the
Fund. Fees incurred under the distribution plan during the year ended October
31, 1994 were 0.35% of average daily net assets attributable to Class A shares
on an annualized basis and amounted to $171,085 (of which FSI retained $31,556).
The Class B and Class C Distribution Plans provide that the Fund will pay FSI a
monthly distribution fee, equal to 0.75% per annum, and a service fee of up to
0.25% per annum, of the Fund's average daily net assets attributable to Class B
and Class C shares. FSI will pay to securities dealers that enter into a sales
agreement with FSI, all or a portion of the service fee, attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended to
be additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. Fees incurred under the distribution plan for the
year ended October 31, 1994 were 1.00% of average daily net assets attributable
to Class B shares and Class C shares on an annualized basis and amounted to
$26,470 and $12, respectively.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within 12 months following the share purchase. A contingent deferred
sales charge may be imposed on shareholder redemptions of Class B shares in the
event of certain shareholder redemptions within six years of purchase. FSI
receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended October 31, 1994 were $0 and $7,154 for
Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earned
$74,831, $5,828, and $2 for Class A, Class B, and Class C shares, respectively,
for its services as shareholder servicing agent for the year ended October 31,
1994. The fee is calculated as a percentage of the average daily net assets of
each class of shares at an effective annual rate of up to 0.15% and up to 0.22%
and up to 0.15% attributable to Class A, Class B, and Class C shares,
respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- --------------------------------------------------------------------------------
U.S. government securities $ 3,851,016 $ 8,243,153
----------- ------------
Investments (non-U.S. government securities) $71,944,574 $ 72,747,862
----------- ------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $ 50,875,945
------------
Gross unrealized depreciation $ (2,298,472)
Gross unrealized appreciation 892,083
------------
Net unrealized depreciation $ (1,406,389)
------------
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
1994 1993
--------------------------------- -----------------------------
Year Ended October 31, Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 461,520 $ 3,566,190 1,221,964 $ 9,740,838
Shares issued to shareholders in
reinvestment of distributions 96,409 749,696 140,304 1,121,326
Shares reacquired (1,946,056) (15,444,256) (3,839,544) (30,917,395)
--------- ------------ --------- ------------
Net decrease (1,388,127) $(11,128,370) (2,477,276) $(20,055,231)
--------- ------------ --------- ------------
Class B Shares
1994 1993<F1>
--------------------------------- -----------------------------
Year Ended October 31, Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
Shares sold 768,786 $ 5,979,512 31,752 $ 263,472
Shares issued to shareholders in
reinvestment of distributions 25,130 199,850 64 529
Shares reacquired (115,220) (895,151) (1) (8)
--------- ------------ -------- ------------
Net increase 678,696 $ 5,284,211 31,815 $ 263,993
--------- ------------ -------- ------------
<FN>
<F1>For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
</TABLE>
Class C Shares
1994+
-----------------------------
Period Ended October 31, Shares Amount
- ----------------------------------------------------------------------
Shares sold 1,754 $ 13,236
Shares issued to shareholders in
reinvestment of distributions 2 19
Shares reacquired (1) (7)
-------- ------------
Net increase 1,755 $ 13,248
-------- ------------
+For the period from the commencement of offering of Class C shares,
September 1, 1994 to October 31, 1994.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each Fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended October 31, 1994 was $796.
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts.
The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. A summary of
obligations under these financial instruments at October 31, 1994, is as
follows:
Written Option Transactions
<TABLE>
<CAPTION>
1994 Calls 1994 Puts
-------------------------------- --------------------------------
Principal Amount Principal Amount
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
Australian Dollars 1,284 $ 3,780 2,269 $ 13,959
British Pounds/Deutsche
Marks -- -- 624 13,990
Canadian Dollars -- -- 1,440 8,897
Deutsche Marks 1,912 21,110 9,816 63,220
Japanese Yen 243,560 33,392 -- --
Swedish Krone/Deutsche
Marks -- -- 12,900 12,790
Swiss Francs 4,579 71,486 -- --
Options written -
Australian Dollars 268 1,907 -- --
British Pound/Deutsche
Marks 1,147 7,332 -- --
Canadian Dollars 500 2,050 500 4,000
Deutsche Marks 23,758 237,523 18,421 199,334
Deutsche Marks/Italian
Lire 850 5,503 -- --
Italian Lire/Deutsche
Marks -- -- 2,092,431 9,642
Japanese Yen 350,980 52,994 2,524,050 369,801
Japanese Yen/Deutsche
Marks 132,016 30,364 -- --
Spanish Paseta/Deutsche
Marks -- -- 98,478 7,058
Swedish Krone/Deutsche
Marks -- -- 6,972 8,438
Options terminated in closing
transactions -
Australian Dollars (1,028) (1,942) -- --
British Pounds/Deutsche
Marks (1,147) (7,332) -- --
Canadian Dollars -- -- (500) (4,000)
Deutsche Marks (8,827) (84,029) (11,421) (172,168)
Italian Lire/Deutsche
Marks -- -- (1,086,829) (5,388)
Japanese Yen (211,156) (28,511) (2,080,281) (298,898)
Japanese Yen/Deutsche
Marks (132,016) (30,364) -- --
Spanish Paseta/Deutsche
Marks -- -- (98,478) (7,058)
Options exercised -
Australian Dollars (524) (3,745) -- --
Deutsche Marks (6,395) (43,191) (6,667) (44,669)
Japanese Yen -- -- (145,258) (40,998)
Swedish Krone/Deutsche
Marks -- -- (6,972) (8,439)
Options expired -
Australian Dollars -- -- (2,269) (13,959)
British Pounds/Deutsche
Marks -- -- (624) (13,990)
Canadian Dollars (500) (2,050) (1,440) (8,898)
Deutsche Marks (5,583) (69,633) (7,538) (38,253)
Deutsche Marks/Italian
Lire (850) (5,503) -- --
Italian Lire/Deutsche
Marks -- -- (1,005,602) (4,254)
Japanese Yen (138,471) (24,504) (142,511) (13,140)
Swedish Krone/Deutsche
Marks -- -- (12,900) (12,790)
Swiss Francs (4,579) (71,486) -- --
------- ------- -------- -------
Outstanding, end of period - 249,778 $ 95,151 158,611 $ 24,227
------- ------- -------- -------
Options outstanding, end of period
consist of -
Deutsche Marks 4,865 $ 61,779 2,611 $ 7,461
Japanese Yen 244,913 33,372 156,000 16,766
------- ------- -------- -------
249,778 $ 95,151 158,611 $ 24,227
------- ------- -------- -------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
At October 31, 1994, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
Net Unrealized
Settlement Contracts to Contracts Appreciation
Date Deliver/Receive In Exchange for at Value (Depreciation)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 11/04/94 CHF 393,872 $ 303,907 $ 314,116 $ (10,209)
11/14/94 - 1/18/95 DEM 12,838,567 8,306,259 8,544,631 (238,372)
1/03/95 DKK 1,716,490 291,523 291,395 128
12/22/94 - 1/31/95 ESP 154,558,141 1,210,218 1,231,161 (20,943)
12/22/94 FIM 725,003 145,249 157,566 (12,317)
12/05/94 - 5/02/95 FRF 8,446,771 1,616,578 1,641,834 (25,256)
11/21/94 - 12/30/94 GBP 408,049 631,931 667,489 (35,558)
11/18/94 IEP 274,954 416,556 442,500 (25,944)
11/04/94 - 11/14/94 ITL 2,511,365,986 1,569,823 1,632,388 (62,565)
11/22/94 JPY 14,439,755 143,929 148,463 (4,534)
12/15/94 - 1/24/95 NLG 2,616,172 1,542,457 1,554,131 (11,674)
11/14/94 SEK 10,286,017 1,327,913 1,430,921 (103,008)
----------- ----------- -----------
$17,506,343 $18,056,595 $ (550,252)
----------- ----------- -----------
Purchases 1/23/95 CAD 745,022 $ 551,062 $ 551,032 $ (30)
1/09/95 CHF 1,744,604 1,360,826 1,395,505 34,679
11/14/94 - 1/30/95 DEM 18,187,100 11,819,543 12,106,498 286,955
12/22/94 - 1/31/95 ESP 81,821,919 654,084 652,185 (1,899)
11/30/94 FIM 718,703 137,446 156,171 18,725
12/05/94 - 1/12/95 FRF 2,190,621 428,276 425,669 (2,607)
11/15/94 - 1/17/95 GBP 700,512 1,097,329 1,145,626 48,297
12/02/94 - 12/30/94 IEP 267,637 411,720 430,739 19,019
11/04/94 - 1/17/95 ITL 2,174,688,571 1,378,804 1,412,958 34,154
11/21/94 - 2/06/95 JPY 365,138,807 3,681,504 3,785,614 104,110
12/15/94 - 1/24/95 NLG 681,144 406,071 404,525 (1,546)
11/29/94 - 12/20/94 SEK 5,426,746 712,685 754,624 41,939
----------- ----------- -----------
$22,639,350 $23,221,146 $ 581,796
----------- ----------- -----------
</TABLE>
Forward foreign currency exchange contract purchases and sales under master
netting arrangements and closed forward foreign currency exchange contracts,
excluded from above, amounted to a net receivable of $35,658 at October 31,
1994.
At October 31, 1994, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
The Fund has approximately 27% of its portfolio invested in high-yield
securities rated below investment grade. Investments in high-yield securities
are accompanied by a greater degree of credit risk and the risk tends to be more
sensitive to economic conditions than higher-rated securities.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Indexed Securities
The Fund invests in indexed securities whose value may be linked to foreign
currencies, interest rates, commodities, indices or other financial indicators.
Indexed securities are fixed income securities whose proceeds at maturity
(principal indexed securities) or interest rates (coupon indexed securities)
rise and fall according to the change in one or more specified underlying
instruments. Indexed securities may be more volatile than the underlying
instrument itself. The following is a summary of such securities held at October
31, 1994:
<TABLE>
<CAPTION>
Unrealized
Appreciation/
Description Index Principal Value (Depreciation)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finnish Export Ltd., 5.5s, 1995 3 year Finnish 860,000 $152,268 $(2,757)
Swap Rate
</TABLE>
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At October 31, 1994, the
Fund owned the following restricted securities (constituting 9.7% of net assets)
which may not be publicly sold without registration under the Securities Act of
1933. The Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees. Certain of these securities may be offered and sold
to "qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Description Date of Acquisition Share/Par Amount Cost Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HidroElectrica Alicura,
8.375%, 1999 4/08/94 500,000 $ 473,258 $ 440,625
National Power Corp.,
7.625%, 2000 1/28/94 1,000,000 985,000 905,000
Independent Bank Co. of
Arizona 4/21/93 125,000 2,750,000 2,750,000
Atlantic Gulf Comm., 0%, 1996 5/29/92 156,600 122,148 133,110
Atlantic Gulf Comm., 0%, 1998 5/29/92 156,600 75,168 86,130
Gillett Hldgs. Inc.,
12.25%, 2002 10/08/92 22,594 213,360 463,177
---------
$4,778,042
---------
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of MFS Strategic Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Income Fund (previously MFS Income & Opportunity Fund), including the
schedule of portfolio investments as of October 31, 1994, and the related
statements of operations, changes in net assets and financial highlights for the
year then ended for Class A and Class B shares, and for the period from
September 1, 1994 (commencement of offering) to October 31, 1994 for Class C
shares. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The financial statements of MFS Strategic Income Fund for the year ended
October 31, 1993 and the financial highlights for each of the six years in the
period ended October 31, 1993 and for the period from October 29, 1987
(commencement of investment operations) to October 31, 1987 for Class A shares,
and for the period from September 7, 1993 (commencement of offerings) to October
31, 1993 for Class B shares, were audited by other auditors whose report dated
December 16, 1993 expressed an unqualified opinion on those statements and
financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1994, by
correspondence with the custodian and brokers or by other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Strategic Income Fund as of October 31, 1994 and the results of its operations,
the changes in its net assets, and the financial highlights for the year then
ended for Class A and Class B shares, and for the period from September 1, 1994
(commencement of offering) to October 31, 1994 for Class C shares, in conformity
with generally accepted accounting principles.
[LOGO] Ernst & Young LLP
Boston, Massachusetts
December 12, 1994
--------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
